India became independent in 1947, the main challenge was not development but rehabilitation and resettlement of refugees from Pakistan. Wartime scarcities had barely eased and the disruption caused by the break-up was enormous at least for Punjab and Bengal. But, on the plus side, India had accumulated ?1.5 billion (?150 billion in today?s money) worth of balances as a payment for the war effort. There was also an economically savvy leader in Nehru. He had laid the foundations of the planned economy back in 1938 when under Subhash Bose?s Presidency Congress had established a National Planning Committee.
The decision had been made. India was to have a planned economy since the War had made planning and a mixed economy conventional wisdom. While Gandhiji pined for a village economy with handicrafts, Nehru wanted industrialisation. India had, uniquely among the colonies, a 90-year background in modern industry by the year of Independence. It was the seventh largest industrial economy by volume of output. It had a large native entrepreneurial class and successful world class industries in cotton and jute textiles. It had railroads, steel, cement and pharmaceuticals.
This was not enough for the impatient nationalist leadership. There was a Left strand in Congress when it came to economics, thanks to Nehru and the many young socialists. As the Fifties progressed, the Communist Party also gave support to this tendency. The right wing of Congress would have been happy going along with the Indian business class. But Nehru was suspicious both of native and of Western capitalists.
The strategy was therefore to rely more on the State for developing new industrial sectors especially in machine making sectors. Imports were to be restricted and there was pessimism about export growth. These machines and consumables previously imported had to be replaced by domestic production. In agriculture, the priority was for tenancy reform and zamindari abolition. The idea was that once these exploitative burdens were removed, output would increase by itself. There was also a plan to pool together the many small fragments of land into large cooperative farms.
India was also going to be self-sufficient and not rely on private foreign capital. Foreign aid was unknown in the early Fifties and the idea was that domestic savings should suffice. The foreign power having left, the drain of resources would cease and thus relieve the hardship. In agriculture as in the national economy, the fundamental belief was that prosperity was there, but only drained away by the exploiters. Once they were removed, the prosperity would return.
Economic statistics were as yet scarce and national income accounting was a new field. India was a pioneer here, thanks to Dadabhai Naoroji and VKRV Rao. But still the policy makers barely knew the roughest magnitudes of income, savings etc. Economics was, even as of 1950, just constructing the theory of economic growth. India became a testing ground as much as the workshop of new theories of development.
Now we know that many of the assumptions were sanguine and fundamental strategic choices flawed. The drain was not as large as thought, only about 1 to 1.5% of national income at most. Farmers were poor not because of exploitation, real though it was, but because productivity was low. India could be self sufficient, but only at a great cost of foregoing the advantages of international division of labour. But at that time in the heady Fifties, the truths of economics were with market intervention and physical planning, distrust of foreign trade and foreign capital. Left to itself, India saved little, and the willingness to tax domestic landlords and industrialists was there but the ability was lacking.
None of this was obvious when the Fifties began. Nehru created the Planning Commission and presided over it. The First Five Year Plan was a modest effort, more a collection of schemes in the pipeline and projects already on the shelf. The results of the first five years were also good. National income grew by 18% ? about 3% per annum, just enough to keep ahead of the population growth. Luckily for the nation and its leader, agriculture had a bumper year in 1954. It looked as if after years of rationing and scarcity, India was to be self-sufficient in food grains at least. Nehru committed Congress to build a socialist pattern of society.
Alas, the reality was to come home soon. But at first India had an enormously ambitious Plan proposed by Prof Mahalanobis. Investment was to be stepped up and industry was to have priority since agriculture was alright. Most of the investment was to be in basic industries. Consumer goods were not to be imported, nor would their production be allowed to go up in the modern sector. Handicrafts were to supply the needs of consumers. The Plan-frame also had a long run perspective of doubling per capita income in 25 years. It was a very exciting time for economists and intellectuals. India was at the forefront of modern theory and modern practice.
Within two years of its launch, the Second Five Year Plan ran into trouble. There were not enough resources to finance either the restricted list of imports or even domestic savings to finance investment. The Sterling balances had been frittered away long ago, mainly helping Indian capitalists to buy up British owned firms. There was a foreign exchange crisis and drastic restrictions had to be imposed on who could spend what abroad. Permits and licenses were required to monitor who got what of the scarce resources. The Plan had to be pruned.
India began to receive foreign aid from around the world; Steel plants by UK, West Germany and Soviet Union were to help raise steel output from two million tons to eight million tons. USA began a programme of food aid and dollar loans to ease the forex situation. Food shortage became a big issue and inflation had to be fought with as a principal menace. Charan Singh defeated Nehru?s pet scheme of co-operative farming.
Even so, India coped hopefully. The Second Five Year Plan led to 25% increase in income. Overall, the Fifties saw a 4.5% average rate of growth. This meant around 1 to 1.5% rate of per capita growth. The Sixties were much worse than the Fifties but better than the Seventies. The Fifties set the strategy of growth in concrete and it could not be changed. It was to be a costly strategy. Employment stagnated and poverty was not reduced. India had shiny machine tool factories but no education or health achievements to boast of. In the meantime, other countries in Asia which had started behind India in terms of income and industry ? Malaysia, Thailand, South Korea ? surpassed India.
Luckily for India, in 1991 the economy crashed. It was a replay of the forex shortage of 1958. This time the Plan was not pruned; the strategy of 40 years was abandoned and India liberated itself from the Fifties. Perhaps the fault was not with the Fifties but later decades where the policymakers became more dogmatic and myopic. Now India has to catch up with 40 years of bad policy.