Economic Planning Series: Falling behind the targets

In the first part of the article on the Second Five-Year plan, we discussed the key features of the plan. In this concluding article, we shall delve deeper into the distribution of financial outlays across various sectors, and present an appraisal of the plan.

Financial outlays

The Second Five-Year Plan targeted an increase in the total national income from Rs 10,800 crore in 1955-56 to Rs 13,480 crore in 1960-61, which was an increase of about 25 per cent. The per capita income was expected to increase by Rs 281 in the same period. In order to do so, the investment rate was to rise from seven per cent of the national income in 1955-56 to 11 per cent in 1960-61, assuming that the rate of population growth would remain stationary at 1.3 per cent per annum and the capital output ratio would be 2.3:1.

The total outlay in the second five-year plan was Rs 4,800 crore, out of which Rs 2,559 crore was to be incurred by the Centre and Rs 2,241 crore by all the states. Of the total outlay, public investment was to be Rs 3,650 crore. There was a big jump in the allocation for industry and mining, which rose to Rs 890 crore (a 400 per cent increase) — most of which was earmarked for large-scale industries. Allocations for the development of railways also went up as compared to the first plan and Rs 1,385 crore was allotted for transport and communications. Because of large outlays on industry and transport, the second plan came to be known as the 'Industry and Transport' plan. While there was a jump in the allocation for industry, the irrigation and power sector and the agriculture and community development sector continued to be important, with a combined outlay of Rs 1,481 crore. Allocation for education doubled from the first plan and stood at Rs 307 crore. Allocation for the health sector also doubled. However, in relative terms, the education and health sectors were allotted much lower than other sectors.

In addition to the public sector investment of Rs 3,600 crore, the private sector investment amounted to another Rs 3,100 crore. Thus, total investment, public as well as private, came to be Rs 6,750 crore as against Rs 3,360 crore in the first plan — the annual average rising from Rs 850 crore in the first year to Rs 1,600 crore in the final year of the plan.

The second plan also saw a big rise in tax effort, and the plan target of Rs 850 crore was easily crossed. Since savings fell short, the government had to resort to deficit financing (about Rs 950 crore) and depend on external assistance (about Rs 1,435 crore).

In the second plan, many hydroelectric projects took off and five steel plants were established. Three of these plants were set up with foreign support — Bhilai with Soviet support, Durgapur with UK's support and Rourkela with German support. The Atomic Energy Commission was also set up during this plan. Another important step was the redrafting of the Industry Policy Resolution of 1948. The target growth rate was 4.5 per cent, against which the actual growth rate turned out to be 3.5 per cent.

An appraisal

The second plan did begin the process of industrialisation in the country but there were many slippages too. While the steel plants were commissioned, the fertiliser plant at Sindri and other places and the ammonium chloride plant fell behind schedule. Similarly, many heavy industry projects in heavy electricals, mining and foundry fell behind schedule. Many other targets in iron and steel, fertilisers, certain items of machinery, heavy castings and forgings, aluminium, newsprint, raw films, chemical pulp, soda ash, caustic soda, dyestuff and cement were not achieved.

Even in the agriculture sector, there were shortfalls in the production of cotton, jute, sugarcane, oilseeds, coal, and electric energy. In brief, the overall growth rate of 3.5 per cent per year turned out to be much below what was anticipated.

At the macroeconomic level, there was persistent inflation across the board, in food prices, raw materials and manufacturing goods — unlike in the first plan. This also had a negative effect on exports. Deficit financing had to be resorted to, which led to a larger than planned fiscal deficit.

Perhaps, most importantly, the objective of taming inequalities did not only remain unachieved, but even worsened. DR Gadgil has pointed out that the condition of the most disadvantaged classes, including almost the entire labouring population, remained stagnant and perhaps deteriorated. Regional imbalances also worsened — with Punjab and Haryana racing ahead and UP and Bihar falling behind.

In respect to the other main objective of the plan, namely employment generation, there was some disappointment as the backlog of the unemployed increased. While eight million jobs were created, this was clearly not enough.

However, at a more fundamental level, the plan was biased towards heavy industry and led to capital deepening, i.e., committing large amounts of capital to heavy industries, which had a long gestation period and low returns. Further, the plan was driven by export pessimism, meaning that India could not compete in the world market because of its limited production capabilities and low technology base. This put India's planning in a loop of import substitution, which, in turn, shut out export growth as a strategy and led to the public sector occupying the 'commanding heights' of the economy. In later plans, this metamorphosed to the license and permit raj, which kept India in a low growth equilibrium. As Ajit Dasgupta points out in 'A History of Economic Thought':

The Mahalanobis model has been criticised 'for being concerned exclusively with investment and for identifying investment with the production of capital goods' (p. 165). Yes, demand constraints and human capital investment are ignored. Another criticism of the model has been its neglect of foreign trade (p. 166). However, the model could be modified easily to account for foreign investment and consumption whereas the incorporation of demand constraints and human capital would not be easy.

Conclusion

While the second plan did not meet many of its objectives such as laying the foundation of heavy industry, the Mahalanobis strategy shut out India from thinking of exports as an engine of growth. Based on the Feldman model, which guided planning in the Soviet Union, the Mahalanobis model also did not give the required importance to human resources, which was reflected in the low allocations to the health and education sectors. The plan also could not meet its objectives of generating employment and reducing inequalities, which was perhaps because of the disproportionate focus on heavy industry. In the external sector, there were large imports and insufficient exports, leading to a stressed rupee, which led to the rupee devaluations in the third plan. All in all, the second plan was a mixed bag, but with many missed opportunities and lesser than expected achievements.

The writer is an IAS officer, working as Pr. Secretary, Technical Education, Training & Skill Development, Government of West Bengal. Views expressed are personal