The Indian Development Planning Era:

Macroeconomic Theory & Practice

Extra Credit Research Paper

The Indian Development Planning Era:

An Analysis of the First & Second Five-Year Plans

SUBMITTED UNDER THE GUIDANCE OF

PROF PRABAL K. SEN

XLRI, JAMSHEDPUR

D. Krishna Bhaskar (B07080)

Vamsi K. Valluri (B07118)

BM-B

________________________________________

PGDBM 2007-09 XLRI, Jamshedpur

1. Introduction

A planned economy is an economic system with a central or overarching body that exercises control over the economy. The concept was a common feature of many Socialism-inspired economies including India and its most extensive form is referred to as a command or centrally planned economy. The model gained prominence mainly because of its adoption by the erstwhile Soviet Union and later on during the �Great Leap Forward’ by China. The anti-thesis of the capitalist-backed �laissez-faire’ model, it is currently practiced actively by very few nations, including Cuba, Myanmar & North Korea.

Ironically, though, as many economists point out, it’s very much alive in the corporate world вЂ" the heart of the capitalist system, as most global corporations are essentially miniature centrally planned economies. Some of the advantages of planned economic development are:

i) Stability

ii) Collective objectives can be met at the cost of smaller individual gains

iii) Adherence to a vision/design

The second and third points mentioned above were a major draw for the newly-independent and emerging nations to opt for this approach.

The following are some of the disadvantages associated with the model:

i) Inefficient resource distribution

ii) Lack of incentive for innovation, hard work, etc

iii) Infringes on individualism

The period beginning late 80s saw India, People’s Republic of China & Soviet Union вЂ" three of the biggest planned economies вЂ" transition to a market economy model owing to several constraints and, in the case of the Soviet Union, political restructuring. After initial transitional hiccups, all three are now counted among the fastest growing economies, globally.

In the Indian context, it is widely held that the planned economic development model was instrumental in laying a firm foundation for industrialization and self-sustenance that has led India to its current global status of an economic powerhouse.

2. Historical Perspective

India’s initial industrialization under the British rule, had fetched largely mixed results for the nation вЂ" on the one hand, India’s production index at 239.7 (in 1938 with 1913 as base) was the second highest in the world (exceeded only by Japan’s 552.0) while on the other, it remained largely non-industrialized and one of the poorest, globally. The British never actively encouraged the extension of the вЂ?laissez-faire’ model across sectors and all that the indigenous entrepreneurs had managed was to establish a modern textile industry. Consequently, different stakeholders вЂ" nationalists, intellectuals, businessmen вЂ" agreed “that laissez-faire was the root of all evil and central planning the new panacea”. (Bhagwati & Desai)

The foundations of India’s development strategy were laid in the pre-Independence era itself, when several entities proposed their vision for India’s future development. Some of the plans included the Sir M. Visveswaraya Plan вЂ" proposed by the master Engineer himself; the Indian National Congress’ National Planning Committee Plan with the blessings of Mr. Jawaharlal Nehru); the вЂ?Bombay Plan’ formulated by a group of prominent businessmen that included Mr. J.N. Tata, Mr. G.D. Birla and Mr. Purushottam Thakurdas among others; The Indian Federation of Labor’s вЂ?The People’s Plan’; and finally, the non-industrialization oriented plan proposed by Mahatma Gandhi’s followers.

Most of the planners were driven by the overarching desire to achieve self-reliance, particularly in the manufacturing goods sector. According to Mr. Nehru, “the three fundamental requirements of India, if she is to develop industrially and otherwise, are heavy engineering and machine-making industry, scientific research institutes and electric power”. The perceived success of Soviet Union in transforming a backward agricultural economy into an industrialized one in a single generation and the general distrust of the вЂ?laissez-faire’ model drove the planners in the direction of a centralized planning-led system following India’s Independence in 1947. The Bombay Plan and People’s Plan too were suitably updated to reflect the prevailing opinion.

With the establishment of the Planning Commission in March 1950, India officially entered the Planning era, ostensibly, to translate the “goals of social and economic policy prescribed in the Directives Principles of the Constitution into a national program based upon as assessment of needs and resources”. Prominent personalities associated with the commission during the initial days include V.T. Krishnamachari, G.L. Mehta, C.D. Deshmukh, T.T. Krishnamachari & P.C. Mahalanobis .

The sheer scale and diversity of the Indian entity caused many contemporary economists to interact вЂ" actively and remotely вЂ" with the Indian leadership and initiate a healthy exchange of ideas. For instance, H. Myint, an eminent development economist has drawn attention to this aspect many times. The exchange helped contemporary ideas influence Indian planning logic and the latter, in turn, influenced the development theory.

3. The Planning Era

The