For those who bothered to look, the problems with planning were always clear
Bibek Debroy | 14 Jun, 2019
THE DEFINING ATTRIBUTE of the Second Five-Year Plan wasn’t the model and the emphasis on heavy industry, though that is how economists invariably depict it. From 1950 to 2014, the Planning Commission went through 12 Five-Year Plans. The last such Plan was the 12th Five-Year Plan, for 2007-2012. Despite being chaired by the incumbent Prime Minister, the Planning Commission and the corresponding Five-Year Plan remained relevant as long as both were in sync with what the political system desired, not otherwise. Therefore, notwithstanding its existence, there were periods when the Planning Commission was relevant and periods when it was less relevant, regardless of the intellectual exercises it indulged in.
The Second Five-Year Plan was a period of relevance. The Avadi session of the Congress was held in 1955 and this led to a resolution which declared that a socialistic pattern of society was the explicit goal. Before that, in November 1954, we had Jawaharlal Nehru’s opening remarks at the third meeting of the National Development Council (NDC). “Therefore, we have to think on these lines and get out of the static habit of thinking, and I think we should be clear, broadly speaking, about the picture we are aiming at. The picture I have in mind is definitely and absolutely a Socialistic picture of society. I am not using the word in a dogmatic sense at all, but in the sense of meaning largely that the means of production should be socially owned and controlled for the benefit of society as a whole. There is plenty of room for private enterprise there, provided the main aim is kept clear.” There were no dissenting voices at that NDC meeting. At least, none were recorded. The Summary Record of Discussions of the National Development Council Meetings was published by the Planning Commission in 2005. No voices of dissent are mentioned in this summary record. The Industrial Policy Resolution of 1948 was replaced by a new Industrial Policy Resolution of 1956. This stated the following: ‘This policy must be governed by the principles laid down in the Constitution, the objective of socialism, and the experience gained during these years… These basic and general principles were given a more precise direction when Parliament accepted in December, 1954, the socialist pattern of society as the objective of social and economic policy. Industrial policy, as other policies, must therefore, be governed by these principles and directions. In order to realize this objective, it is essential to accelerate the rate of economic growth and to speed up industrialization and, in particular, to develop heavy industries and machine making industries, to expand the public sector, and to build up a large and growing cooperative sector…. Equally, it is urgent, to reduce disparities in income and wealth which exist today, to prevent private monopolies and the concentration of economic power in different fields in the hands of small numbers of individuals. Accordingly, the State will progressively assume a predominant and direct responsibility for setting up new industrial undertakings and for developing transport facilities. It will also undertake state trading on an increasing scale…. The adoption of the socialist pattern of society as the national objective, as well as the need for planned and rapid development, require that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector. Other industries which are essential and require investment on a scale which only the State, in present circumstances, could provide, have also to be in the public sector, The State has, therefore, to assume direct responsibility for the future development of industries over a wider area.’
The Planning Commission and the Second Five-Year Plan document were part of this jigsaw. The First Five- Year Plan document may have referred to the Directive Principles of State Policy, but had not used the expression ‘socialist pattern of society’. The Second Five-Year Plan document began with this expression. For the record, the Second Five-Year Plan assumed a capital-output ratio of 2.3. The investment rate was expected to increase from around 7 per cent in 1955-56 to 10.7 per cent in 1960-61. The annual average rate of gross domestic product growth was expected to be 4.53 per cent. The actual growth rate was 4 per cent, not that short of expectations. There were some occasional worries about lack of resources and foreign exchange. However, overall, most people weren’t critical of the economic performance.
But India was already along the path of a socialist pattern of society. The seeds had been sown for public and private monopolies, leading to protected domestic markets and inefficiencies. The seeds had been sown for import substitution. The seeds had been sown for export subsidies, to ensure that inefficient domestic enterprise survived in competitive global markets. The seeds had been sown for neglect of agriculture, consumer goods and small-scale industry. Perhaps most devastating of all, the seeds had been sown for a maze of controls and regulations. In 1958, a journalist named Alexander Campbell published a book on India, titled The Heart of India. This book has never been published or printed in India and since 1959, there has been a ban on its imports into India. It is an extremely patronising book, though that should hardly be a reason for a ban. There is a section about a meeting with Vaidya Sharma of the Ministry of Planning. ‘[Vaidya Sharma] put away the housing- development papers, and talked again about the Five Year Plan. ‘We have now entered the period of the second Plan. The first Plan built up our food resources; the second Plan will lay the foundations for rapid creation of heavy industry. Delhi, as the capital of India, will play a big part, and we are getting ready to shoulder the burden. We are going to build a big central stationery depot, with a special railway-siding of its own. There will be no fewer than 12 halls, each covering 2,000 square feet. They will be storage halls, and,’ said Sharma triumphantly, ‘we calculate that the depot will be capable of an annual turnover of 1,400 tons of official forms, forms required for carrying out the commitments of the second Five Year Plan!’’ This might very well be concocted and exaggerated, but there is a grain of truth somewhere.
John Kenneth Galbraith was ideologically far removed from Milton Friedman. In 1955, he spent some time in India, as an adviser to the Indian Statistical Institute. In 1961, he returned as the US ambassador to India. In 1958, he authored a perceptive piece on India. This was titled ‘Rival Economic Theories in India’ and was published in Foreign Affairs in July 1958. ‘If we are to understand the impact on India of foreign economic ideas we must first recognize how immune the Indian economy is to influence from any source, including that of the Indian Government…. Out of the depths of this experience the village has a deeply ingrained mistrust of the world outside, and this mistrust is directed first of all at those who presume to govern…. The economic life of the village is concerned, indeed, preoccupied, with the production of food. And so, therefore, is Indian economic life as a whole… It seems to be recognized that Russian and East European agricultural experience is inapplicable to India. But other agricultural suggestions strike one as having a rather uncertain or even academic tone…. Perhaps the greatest success of both the First and Second Plans has been the Village Development Program.’ When it had already been announced that he would become the next US ambassador to India, he disparagingly described the Indian experience as “post office socialism”. There was some furore over the remark at that time. The Indian experiment with socialism thus got the stick both from the right (Friedman) and the left (Galbraith). But note that there were few Indian economists who opposed it at the time. Before I am criticised for that statement, there were some, but not that many. In general, the economist fraternity/sorority went ahead with what the political system wanted.
I met Galbraith when he was around 83. I met him at a conference in Harvard and was seated next to him at dinner. At that age, his memory wasn’t what it used to be. He told me that in 1955 (obviously not as US ambassador in 1961) he authored a report for the Indian Government and handed it over to the then Prime Minister Jawaharlal Nehru. He also told me, circa 1956, there was a debate between Nehru and Ashoka Mehta in Parliament over this report. I find no mention of either the report or the debate anywhere. Nevertheless, with the benefit of hindsight, there were clearly reasons for worry, even though that got drowned in the general undertone of euphoria.