2.2. The Nehru-Mahalanobis Development Strategy

The era of planned development was ushered in with the launch of the First Five-Year Plan in April 1951 (the Harrod-Domar model with some modifications was the underlying model for the First Plan). It addressed the problems arising from massive influx of refugees, acute food shortage and mounting inflation. The highest priority was given to overcoming the food crisis by raising foodgrain output, curbing inflation and the development of infrastructure.

The Second Five-Year Plan is regarded as the milestone in the trajectory of planning since it was based on the Nehru-Mahalanobis strategy of development, which guided the planning practice for more than three decades until the end of the Seventh Five-Year Plan. The draft outline of this plan was framed by P C. Mahalanobis. This development strategy was based on several assumptions regarding the causes of structural backwardness of the Indian economy. First, severe deficiency of material capital was seen as the basic constraint of development since it prevented the introduction of more productive technologies. Second, the low capacity to save was considered as the limitation on the speed of capital formation. Third, it was believed that through industrialization the surplus labour underemployed in agriculture could be productively employed in industries. Fourth, it was presumed that if the market mechanism were given primacy, this would lead to excessive consumption by higher-income groups, along with relative underinvestment in the sectors essential to the accelerated development of the economy.

Given these assumptions, the basic questions before the planners were: How to increase capital stock rapidly? How to invest wisely? How to increase savings? How to regulate the market? The Nehru-Mahalanobis development strategy found the answer to these questions in rapid capital formation through the development of capital goods industries with direct intervention of the state in the economy. As such, it was based on the principle—higher the allocation of investments to the heavy or capital goods industries, lower will be the rate of growth of income in the short run, but higher will it be in the end. Thus, industrialization with preference to capital goods industries over consumer goods industries became the core of this development strategy. The basic elements of this strategy can be summed up as:

♤ Raising the rate of investment since the rate of development is dependent on the rate of investment. It involved stepping up domestic and foreign savings also.

♤ Rapid growth of the productive capacity of the economy by directing public investment towards development of industries, especially capital goods industries. Simultaneously, promotion of labour-intensive small and cottage industries for the production of consumer goods and expansion of employment opportunities.

♤ Import substitution for self-reliance and reduction of external dependence.

♤ Setting up of an elaborate system of controls and industrial licensing to allocate resources among industries as per the Plan requirements and distribute consumption goods equitably among the consumers. This was done through the Industries Development and Regulation Act (IDRA) of 1951.

♤ Enhancing the scope and importance of the public sector so that this sector comes to predominate capital goods industries, and controls the commanding height of Indian economy.

In this way, the Second Five-Year Plan sought to promote a pattern of development that would ultimately lead to the establishment of a socialistic pattern of society in India. The development strategy of the Third Plan was basically the same as that of the Second Plan but the highest priority in this Plan was accorded to agriculture.