Economic Planning Series: Falling Behind the Goals

In the first part of the article on the second five-year plan, we discussed the main features of the plan. In this concluding article, we will dig deeper into the distribution of financial expenditures among the different sectors and present an evaluation of the plan.

Financial expenses

The second five-year plan targeted an increase in total national income from Rs 10,800 crore in 1955-56 to Rs 13,480 crore in 1960-61, an increase of about 25%. Per capita income is expected to increase by Rs 281 over the same period. To do this, the rate of investment had to increase from 7% of national income in 1955-56 to 11% in 1960-61, assuming that the rate of population growth would remain stationary at 1.3% per year and the ratio of capital production would be 2.3:1.

The total expenditure in the second five-year plan was Rs 4,800 crore, of which Rs 2,559 crore was to be incurred by the Center and Rs 2,241 crore by all the states. Out of the total expenditure, the 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% increase) – most of which was earmarked for large industries. Allocations for railway development have also increased from the first plan and Rs 1,385 crore has been allocated for transport and communications. Because of the large expenditures on industry and transport, the second plan was known as the “Industry and Transport” plan. Although there was a jump in the allocation for industry, the irrigation and power sector and the agriculture and community development sector continued to be significant, with an outlay combined of Rs 1,481 crore. The education allowance doubled from the first plan and stood at Rs 307 crore. The allocation for the health sector has also doubled. However, in relative terms, the education and health sectors received much lower allocations than the other sectors.

In addition to the public sector investment of Rs 3,600 crore, private sector investment amounted to a further Rs 3,100 crore. Thus, the total investment, public and private, amounted to Rs 6,750 crore 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 last year of the plan. .

The second plan also saw a big increase in tax effort, and the plan’s target of Rs 850 crore was easily breached. Since savings were insufficient, the government had to resort to deficit financing (about Rs 950 crore) and depend on external aid (about Rs 1,435 crore).

In the second plan, many hydroelectric projects were started and five steel mills were established. Three of these factories were established with foreign support – Bhilai with Soviet support, Durgapur with UK support, and Rourkela with German support. The Atomic Energy Commission was also created during this plan. Another milestone was the revamping of the Industrial Policy Resolution of 1948. The target growth rate was 4.5 percent, against which the actual growth rate was found to be 3.5 percent .

An evaluation

The second plan launched the process of industrialization of the country, but there were also many slippages. During the commissioning of the steel mills, the fertilizer plant in Sindri and other places and the ammonium chloride plant fell behind schedule. Similarly, many heavy industry projects in heavy power, mining and smelting have been delayed. Many other purposes in iron and steel, fertilizers, some machinery, heavy castings and forgings, aluminum, newsprint, raw films, chemical pulp, carbonate sodium, caustic soda, dyes and cement were not reached.

Even in the agricultural sector, there were deficits in the production of cotton, jute, sugar cane, oilseeds, coal and electric power. In short, the overall growth rate of 3.5 percent per year turned out to be much lower than expected.

At the macroeconomic level, inflation persists in all areas, food prices, raw materials and manufactured goods, unlike the foreground. This also had a negative effect on exports. Deficit financing had to be resorted to, resulting in a larger budget deficit than expected.

Perhaps, more importantly, the goal of taming inequality has not only remained unfinished, but has even worsened. Dr Gadgil pointed out that the condition of the most disadvantaged classes, including almost the entire working population, remained stagnant and possibly deteriorated. Regional imbalances have also worsened – with Punjab and Haryana leading and UP and Bihar lagging behind.

With regard to the other main objective of the plan, namely job creation, there was some disappointment with the increase in the backlog of unemployed. While eight million jobs were created, that was clearly not enough.

However, at a more fundamental level, the plan was biased in favor of heavy industry and led to capital deepening, i.e. the commitment of large amounts of capital to heavy industries, which had a long gestation period and low yields. Moreover, the plan was driven by export pessimism, which meant that India could not compete in the global market due to its limited production capacities and weak technological base. This put India’s planning in an import substitution loop, which in turn ruled out export growth as a strategy and drove the public sector to occupy the “commanding heights” of the economy. . In later plans, this metamorphosed into license and permit raj, which kept India in a low growth equilibrium. As Ajit Dasgupta points out in ‘A history of economic thought’:

Mahalanobis’ model has been criticized “for being exclusively concerned 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 easily modified to account for foreign investment and consumption while incorporating demand and human capital constraints would not be easy.

Conclusion

While the second plan failed to achieve many of its goals such as laying the foundations for heavy industry, the Mahalanobis strategy prevented India from viewing exports as an engine of growth. Based on the Feldman model, which guided planning in the Soviet Union, the Mahalanobis model also failed to give due importance to human resources, which was reflected in low allocations to the health and education sectors. The plan also failed to achieve its goals of creating jobs and reducing inequality, perhaps due to the disproportionate emphasis on heavy industry. In the external sector, there were large imports and insufficient exports, which led to a stressed rupee, which led to the rupee devaluations in the third plan. Overall, the second plan was a mixed bag, but with many missed opportunities and less than expected accomplishments.

The author is an IAS officer, working as Prof. Secretary, Technical Education, Training and Skills Development, Government of West Bengal. Opinions expressed are personal

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