Evolution of Indian Economy & Reforms

In the backdrop of partition and independence, India was mired in the stranglehold of issues like stagnating per capita national income, poorly developed industries, inadequate infrastructure, mass poverty, extreme unemployment and underemployment, etc. In this context, planned development emerged as the key strategy of India’s developmental efforts. It provided for a systematic utilization of the available resources at a progressive rate on a national scale to achieve substantial progress on the socio-economic front. The era of planned development was ushered in with the launch of the First Five-Year Plan in April 1951 (the Harrod-Domar model), which addressed the problems arising from the massive influx of refugees, acute food shortage, and mounting inflation. However, it was the Second Five-Year Plan which is regarded as the milestone in the trajectory of planning. 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 significant contributions of the Second Five-Year Plan can be discussed as follows:

• Rapid growth of the productive capacity of the economy by directing public investment towards the development of industries, especially capital goods industries. Industrialization with a preference for capital goods industries over consumer goods industries became the core of this development strategy.
• Creation of basic physical and human infrastructure and progress in the sphere of human capital due to the setting up of institutions of higher learning, especially in the scientific field.
• 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. This resulted in economic growth and both the savings and investment rates rose substantially.
• Growth in agricultural production because of land reforms, the Community Development Programme, large investments in irrigation and power, and agricultural research. It also included the simultaneous promotion of labor-intensive small and cottage industries for the production of consumer goods and the expansion of employment opportunities.
• Enhancement of the scope and importance of the public sector, so that this sector comes to predominate capital goods industries, and controls the commanding height of the Indian economy.
• Import substitution for self-reliance and reduction of external dependence.

Endeavors towards setting up an elaborate system of controls and industrial licensing to allocate resources among industries as per the Plan requirements through the Industries Development and Regulation Act (IDRA) of 1951. The Nehru-Mahalanobis strategy of development, however, faced considerable criticism owing to its greater emphasis on industrialization compared to agriculture, due to which the latter suffered. Allocation of higher priority to heavy industries compared to labor-intensive industries also resulted in heavy concentration of wealth and large-scale unemployment. Further, it was argued that the objective of removal of poverty could not be achieved by growth itself. Nevertheless, the Second Five-Year Plan laid the bedrock for the basic physical and human infrastructure for comprehensive development in society going forward.