Central economic planning and India's economic performance, 1951-1965.

Author:Manish, G.P.

While India remained under colonial rule during the first forty-seven years of the twentieth century, its national income grew at the low rate of 1.3 percent per annum. From 1900 to 1914, the growth rate was 1.45 percent, and income per capita grew by 1 percent per annum. Economic performance worsened between 1914 and 1947. The national income grew at an average rate of 1.08 percent per annum, and income per capita was essentially stagnant, recording a growth rate of 0.06 percent per annum (Roy 2006, 78). (1) In stark contrast, the growth rates of gross domestic product (GDP) recorded for independent India during the first fifteen years of central planning were much higher. India's GDP growth rate was nearly 4 percent per annum during the first two Five-Year Plans (FYPs), spanning the years 1951-56 and 1956-61, respectively, and it was 4.5 percent per annum during the first four years of the Third FYP, from 1961 to 1965 (Panagariya 2008, 23). (2) The rate of growth of GDP per capita during the same period averaged 2 percent, which is impressive when compared to the rate in colonial days. Writing in 1965, K. N. Raj succinctly summarized the contrast in the recorded growth rates: "The rate of economic growth that has been achieved in India since 1950-51 is 2 to 3 times as high as the rate recorded earlier under British administration. As a result, the percentage increase in national income in the last thirteen years has been higher than the percentage increase realized in India over the entire preceding half a century" (1965, 2).

Several economists, after observing the foregoing data, concluded that the introduction of economic planning caused a significant improvement in India's economic performance. The economists who came to this conclusion unsurprisingly include planning enthusiasts (e.g., Raj 1965; Millikan 1968; Rao 1983; Chakravarty 1987;). Alter all, for those who defend India's economic policies in the planning era, this boost to India's GDP growth rate was Indian planning's biggest achievement.

It is surprising, however, that Jagdish Bhagwati, a vigorous supporter of the post-1991 market reforms and an eminent critic of India's experiment with planning, holds the same view. Over the years, he has argued that India's planning apparatus instituted an inefficient policy framework that stifled productivity and innovation (Bhagwati and Desai 1970; Bhagwati and Srinivasan 1975; Bhagwati 1993). He has trenchantly stated that the "maze of Kafkaesque controls" imposed on India's private sector during the planning years had "no rationale in economic or social logic" (1993, 50) and also has, on more than one occasion, praised the pro-market reforms of the 1990s (Bhagwati 1993; Bhagwati and Srinivasan 1993).

Nevertheless and seemingly at odds with his economic weltanschauung, Bhagwati had the following to say about India's economic performance during the years from 1951 to 1965: "The overall performance, in terms of absolute and per capita incomes, of the three Plans is on the whole quite respectable.... Furthermore, this performance represents a distinct improvement over the performance in any historical period for which information is systematically available; it certainly represents an acceleration of the growth we recorded ... for the preceding five decades of India's modern history" (Bhagwati and Desai 1970, 64). Writing more than two decades later, he does not seem to have changed his mind. Instead, he agrees with those who argue that "compared to the pre-independence period under British rule, the Indian growth rate (post-independence) has been remarkable" (1993, 24).

It is remarkable that an author so critical of planning in India should hold this view regarding India's economic performance under the first three FYPs. Although Bhagwati often finds fault with the GDP growth rate during this period for being lower than what it should have been and for being lower than the growth rates recorded in other developing countries, such as the East Asian economies, his opposition to planning seems rather weak. (3) If central planning boosted India's GDP growth rate, and if this increase is interpreted as an indicator of significant improvement in India's economic performance, what accounts for the opposition to economic planning? One might argue that the poor growth rates of the late 1960s and 1970s were caused not by the failures of central planning per se, but instead by planning gone astray and done poorly. In other words, one might argue that nothing is fundamentally or essentially wrong with the policy of centralized planning. Thus, instead of embracing market forces, perhaps the solution to India's economic ills in the 1990s lay in a reform of the planning process to make it work properly, as it had under the first three FYPs.

In this article, I challenge the view that the introduction of planning led to a marked improvement in India's economic performance. I argue that under the first three FYPs India experienced both stagnation in the living standards of the masses and massive malinvestment of resources, despite the measured GDP growth. To support my argument, I draw on the works of father and daughter B. R. Shenoy (1963, 1968) and Sudha Shenoy (1971), whose analysis of India's economic development during this period has been largely ignored. I also draw on a broader literature (Lavoie 1985; Higgs 1992, 2004; Powell 2005) that critiques the policy of forced industrialization and debunks the idea of "wartime economic prosperity" by applying the theoretical insight, first advanced by Ludwig von Mises (1990, 1998) and extended by Friedrich A. Hayek (1945, 2009), that economic calculation is impossible in a centrally planned command economy.

The Indian Economy under Economic Planning, 1950-1965

The Planning Apparatus

Central economic planning in India began in the midst of World War II. As B. R. Tomlinson notes, in an effort to channel resources as required to promote prosecution of the war, "all mill production of wool textiles, all factory production of leather and footwear, all organized production of timber, nearly three-fourths of steel and cement production, over two-fifths of paper production, about one-sixth of cotton textile production and the whole of the normal quota of 600 million yards of cotton yarn had been directed away (by the colonial government) from the civilian economy to serve military requirements" (1992, 277).

The huge reduction in the supply of consumer goods and a whopping 700 percent increase in the money supply during the war years caused a savage rise in the prices of consumer goods. The government's response was to impose a slew of price controls, distribution controls, and rationing schemes for a host of commodities. The rationing and procurement apparatus for food grains was particularly harsh and all pervasive. As the unofficial American Famine Commission noted, "No country in the world, with perhaps the exception of Russia, has gone so far [as India] in controlling basic food distribution--not even Germany under the Hitler dictatorship" (qtd. in Tomlinson 1992, 279).

Furthermore, a system of import controls and capital-issues controls as well as a rudimentary system of industrial licensing were introduced, all in the name of controlling inflation and conserving scarce foreign exchange.

Most of these controls outlived the war. In fact, the infatuation with economic control and planning spread to the imperial government as well. Toward the end of the war, in 1944, it set up the Department of Planning and Development, which in the following year issued "a Statement of Industrial Policy which foreshadowed in many ways the Industrial Policy Resolutions of 1948 and 1956" (S. Shenoy 1971, 21).

After independence in 1947, the newly empowered Indian government continued to add to this planning apparatus and enshrined many of the inherited regulations and powers of control in legislative dictate. The Planning Commission, instituted in 1950 with Prime Minister Jawaharlal Nehru at its helm, had responsibility for drafting the document that formed the entire planning system's cornerstone--namely, the FYP. Each plan was supposed to spell out the exact amount of the investments to be made by the public and private sectors and how that investment would be allocated across sectors. It also included a list of targets to be achieved by various industries for the next five years.

The Industrial Policy Resolutions (IPRs) of 1948 and 1956 divided the economy's industries into three broad categories. The first category included industries in which either the state would have a total monopoly or only the state could undertake any new investment. Existing private firms in these industries could continue to operate and expand, but no new private firms could enter. The second category included industries in which the state would gradually establish new units, while allowing new private firms to enter as well. The third category contained the industries that would be the private sector's responsibility. The state, however, could enter these industries if it wished to do so. In the IPR of 1956, for example, "[s]eventeen industries, including heavy electrical plant, heavy castings, and forgings of iron and steel, were grouped into one category where the state would either have total monopoly or have exclusive right to establish new industrial establishments. Twelve other industries ... were specified as the sector where the state would progressively establish new units.... The remaining industries were left largely to the initiative of the private sector, although naturally the state retained the option to enter" (Bhagwati and Desai 1970, 142-43). Although in practice the government did not always adhere to the IPRs' rigid categorizations, it clearly planned to build a significant public sector while simultaneously freezing the private sector out of a sizable chunk of the economy.


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