Economic Planning Series: Achievements & missed opportunities

The second five-year plan was launched in 1956 on the back of successful achievement of the first plan growth targets. However, poverty was widespread, aggregate production was low and unemployment troubled the planners. In this backdrop, it was felt that growth needed to speed up with a focus on heavy industries — a strategy that came to be known as the 'Mahalanobis' strategy. This strategy was named after the well-known statistician PC Mahalanobis who had proposed an economic development model in 1953, which laid stress on developing heavy industries, and was inspired by the Feldman model of the Soviet Union.

In this two-part article, we will look at the key features of the second five-year plan, its major achievements and alternative strategies that could have been pursued.

Key features

The planners made no secret of the fact that much remained to be done. They were worried about the imbalanced regional development, sluggishness in the economy, widespread poverty, shortfall in production and lack of modern ideas. The following passage from the 'Approach to the Second Five-Year Plan' illustrates this:

Significant as the achievements of the first plan have been, it is apparent that they have to be regarded as no more than a beginning. The task is not merely one of reaching any fixed or static point, such as doubling of living standards, but of generating a dynamism in the economy which will lift it to continually higher levels of material well-being and of intellectual and cultural achievements. The current levels of living in India are very low. Production is insufficient even for satisfying the minimum essential needs of the population, and a large leeway has to be made before the services and amenities required for healthy living can be brought within the reach of any significant proportion of the population. There are large areas or regions of the country which are underdeveloped even in relation to the rest of the country and there are classes of the population which are almost untouched by modern progressive ideas and techniques. It is necessary to proceed faster with development, and this, it must be emphasised, is possible only to the extent that a larger measure of effort, both financial and organisational is forthcoming. For several plan periods to come, it is on the mobilisation of the effort rather than on the gains and returns arising therefrom that attention has to be concentrated. These gains and returns are important, but more important is perhaps the satisfaction that a community gets from attempting a worthwhile task which gives it a chance to bend its energies to productive and socially useful purposes. The 'costs' of development, viewed in this light, are a reward in themselves. There is no doubt that given a right approach to problems of development, including social policy and institutional change, a community can draw upon the latent energies within itself to an extent which ensures development at rates much larger than nice calculations of costs and returns or inputs and outputs may sometimes suggest.

The 'Approach to the Second Five Year Plan' also underlined that India should strive for a socialist pattern of society, where social gain, rather than private profit, should be the philosophy guiding economic policies. And this should be reflected in all major decisions on production, distribution, consumption and investment. The ultimate objective was that the fruits of development should spread to the lower strata of society and, for this, the public sector had to play the leading role. Public sector would have to rely on modern technology to undertake large-scale development and set up heavy industries and capital goods industries. Accordingly, the following were set out as the objectives of the second plan:

✯ A substantive increase in national income

✯ Rapid industrialisation, with particular emphasis on the development of basic and heavy industries

✯ A large expansion of employment opportunities

✯ Reduction of inequalities in income and wealth

On raising national income, the plan aimed to raise it by 25 per cent over the five years of the plan. To do so, the plan emphasised that production and investment had to increase. This rise in production and expansion of investment, would, in turn, depend on rapid industrialisation, which would raise employment. The extent to which it would raise employment depended on the choice of techniques and the fact of labour abundance. Finally, the pattern of development should be such that it would be spread across regions and classes and lead to a reduction in inequalities. In short, all the objectives of the plan were interrelated.

To elaborate on the type of industries, I have mentioned above that the emphasis was on heavy industries and capital goods industries, and not basic industries. The reason for this was that basic industries were not employment-intensive and also could not produce a large range and number of consumer and capital goods. Clearly, the planners were mindful of the prevailing high levels of unemployment and the need to increase jobs. Accordingly, the prescription was to use labour-intensive techniques, even if this was at the expense of some efficiency and a higher cost of products. Furthermore, there was a sense that growth in industries would lead to all-round higher employment, which could also take care of the labour-surplus agriculture sector — perhaps an inspiration from the development model proposed by Arthur Lewis (the Lewis model). Finally, the focus on heavy industries and capital goods ('machines that make machines') was expected to create a sound industrial infrastructure that would facilitate the setting up of other industries.

As noted above, a focus on heavy industries was expected to generate employment, which would also address the problem of under-employment in agriculture and the micro/small industries. However, the planners were also concerned about the quality and nature of employment. They were as concerned about employment in capital goods industries as in the wage goods industries. Further, the planners also realised that unemployment was more a concern in countries where technology and innovation was not used and productivity was low. According to the plan, the objective was to rest at a labour market equilibrium where high income levels prevailed. To quote from the plan documents:

From the economic as well as from the larger social view point, expansion of employment opportunities is an objective which claims high priority, but, it is important to stress the fact that over period, the volume of employment grows only as the supply of tools and equipment on the one hand and of the wage goods on which the incomes of the newly employed come to be spent is expanded. If the essence of development is the undertaking of new tasks to build up the apparatus of production, the extent to which the available manpower in the country can be used safely for these tasks depends upon the degree to which the supply of wage goods like food, cloth, sugar, and house-room can be augmented quickly. Improvements in productivity in these lines are thus of vital importance from the point of view of employment itself. It is only a truism that the problem of unemployment of an endemic kind is not acutest in the countries in which productivity is high because of the use of machinery and new techniques but in those in which low productivity limits the overall size of incomes, inhibits the use of labour on works which do not add immediately to the supply of currently needed consumer goods and keeps down the size of the market. While it is imperative that in a country with an abundant supply of manpower, labour-intensive modes of production should receive preference all along the line, it is nonetheless true that labour-saving devices in particular lines are often a necessary condition for increasing employment opportunities in the system as a whole. The objective, it need hardly be stated, is increasing employment at rising levels of incomes.

The reduction in income and wealth inequalities and regional imbalances was the other important objective of the second plan. For this, income levels needed to be raised at the lower level and reduced at the higher levels. For this, a mix of fiscal measures, expansion of social services, generation of employment and institutional changes that would lead to a change in land ownership were considered necessary. In particular, a progressive tax system was necessary and other changes in the tax regime such as a tax on expenditure and wealth could be considered. To quote from the Plan documents:

It is possible that rather far-reaching changes in the tax system will be required, if the more well-to-do classes of society are to be called upon to make a larger contribution to the resources for development without losing in the process the incentive to work harder or to save more. It has recently been suggested that the substitution of expenditure for income as the basis for personal taxation, coupled with measures to tax wealth and capital gains, can bring about this result. The idea of an expenditure tax has been discussed by economists on several occasions in the past. There is a growing body of expert opinion in favour of an expenditure tax. There are, however, administrative problems which have to be resolved before a change of this character can be made. It may be that an experimental approach on a limited scale may have to be adopted initially. Experience in more advanced countries seems to indicate that progressive income taxes on the scales that are now prevalent are in reality not so effective, firstly because the incomes by way of capital gains escape such taxation, and secondly because there is a great deal of evasion in various ways. A tax based on expenditure may encourage saving, and, in theory at any rate, it is a more effective instrument than an income tax for moderating inflationary or deflationary tendencies.

The Second Five-Year Plan is often referred to as the Mahalanobis Plan, since his prescription to focus on heavy industries and capital goods manufacturing was followed in the plan. In slightly more technical terms, the Mahalanobis model is a two-sector model with a capital goods and a consumption goods sector. It allocates resources between these sectors in such a manner that maximum economic growth is achieved. There was, of course, a lot of criticism of the Mahalanobis model on grounds that it relied too heavily on industry and that it would lead to capital deepening at the expense of labour. We will discuss this in more detail in the part-2 of this article.

To be continued

The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal. Views expressed are personal