Development Planning

Development Planning
The Indian Experience
SUKHAMOY CHAKRAVARTY
CLARENDON PRESS • OXFORD

1987
Oxford University Press, Walton Street, Oxford 0X2 6DP
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British Library Cataloguing in Publication Data

Chakravarty, Sukhamoy
Development planning: the Indian experience.
1. India—Economic policy—1947—
I. Title
338.954 HC435.2
ISBN 0-19-828555-8
Library of Congress Cataloging in Publication Data

Chakravarty, Sukhamoy.
Development planning.
Bibliography: p.
Includes index.
I. India—Economic policy—1947-
2. India—Social policy. I. Title.
HC435.2.C467 1987 338.954 87-1554
ISBN 0-19-828555-8
Set by Colset Private Limited, Singapore

Printed in Great Britain
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by David Stanford
Printer to the University
For my daughter Mouri,
who may learn what was attempted.
Digitized by the Internet Archive
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Preface
India’s attempt at planned development over the greater part of her

post-independence existence has been the subject of many studies,
both at home and abroad. These studies have been written from a
variety of view points, descriptive and analytical, critical and sym¬
pathetic. During the late fifties and early sixties, studies—even the
critical ones—were appreciative up to a point, expressing some form of
positive endorsement of what was being attempted by the planners.
The tone changed towards the end of the sixties, and has stayed quite
critical not only in the West but also within India itself. While the
change in tone can be explained by a variety of factors, seldom has any
attempt been made, especially of late, to put forward the Indian expe¬
rience as a form of societal response, legitimated by a democratic poli¬
tical process and underpinned by specific analysis. The norm by which
Indian planning has been judged has generally been tempered not by
an appreciation of what was possible, but by what has been done else¬
where, be it China or South Korea.
In this book, which was originally delivered as three Radhakrishnan
Memorial Lectures at All Souls College, Oxford, in the summer of
1985, I choose to present a synthetic overview of the Indian experience
of development planning. As a student of development economics, and
also as one who was a member of the Indian Planning Commission for
nearly half a dozen years, I tried to present an analysis of what led India
to opt for development planning in the first instance, of the difficulties
encountered, and the problems that Indian planning is faced with
today. It has been my view that India’s initial choice of a development
strategy was not only justified but in some sense a ‘natural’ one; and
although marred by inadequacies of design and implementation, it has
constituted a major effort to reshape India’s economy and society. The
way out of the present problems lies not in giving up planning but in
giving it new content.
In preparing these lectures in book form, I have expanded them con¬
siderably, especially by inserting specific chapters on plan imple¬
mentation and adding substantially to the discussion on current issues
of policy. I have also added a statistical appendix setting out the
numerical data which forms the basis for the various qualitative and
quantitative statements interspersed in the text. I have also made use of
some ideas presented as part of my D. V. Glass Memorial Lecture at
the London School of Economics in May 1985, as well as at two
seminars given at Queens’ College, Cambridge.
Dr Sudhir Anand, Dr Vijay Joshi, and Professor A. K. Sen strongly
encouraged me to expand the original lectures. At Cambridge, dis¬
cussions with Dr Ruchira Chatterji, Dr Jayati Ghosh, Dr Michael
Landesmann, and Dr Ajit Singh have proved useful. I must also record
that the approach adopted here owes not a little to the discussions I
have had with Lalita Chakravarty.
I have two very specific acknowledgements to make. I owe a great
deal to the devoted labour of Mr A. P. Pandey, who has successfully
coped with the problem of typing the manuscript, and to Mr S. N.
Raghavan for his considerable help in the preparation of the Statistical
Appendix.
Sukhamoy Chakravarty
Delhi, March 1986
Contents
1 Indian Planning: Basic Features and Analytics 1

/^Foundations of India’s Development Strategy:
The Nehru-Mahalanobis Approach 7
3 Vicissitudes in the Career of a Strategy 19
4 Problems of Plan Implementation 39
/ 5 Some Current Issues of Economic Policy 53
6 Conclusion 81
Notes 91
Statistical Appendix 103
Index of Names 129
Subject Index 131
1
Indian Planning:
Basic Features and Analytics
The present book, which develops the themes I initially presented in

my lectures delivered in memory of Sarvapalli Radhakrishnan—an
eminent philosopher and a distinguished public man who was for
several years president of the Indian Republic—deals with the expe¬
rience of development planning in India. My objective has been to
ascertain and evaluate the type of reasoning that has gone into the
formulation of Indian plans. A possible title for this book could have
been Economic Theory and Indian Planning, but that would not have
adequately conveyed my purpose. I do not propose to deal with the
various plans as abstract exercises of a decision-theoretic kind. Any
development plan, as an operating document which forms the basis for
implementation, is rarely identical with a plan model. To judge a deve¬
lopment plan, one must therefore take into account the socio-economic
landscape, as well as the informal constraints which the planners had to
respect. It is, however, a fact that Indian plans have often been judged
only by the adequacy, or otherwise, of the models which constituted
their analytical underpinnings, although these by no means exhaust
their full set of implications. The lectures I delivered constituted some¬
thing of a departure from this procedure. I wanted to describe and
analyse the experience of development planning in its two-sidedness.
Theoretical understanding at a given point in time, based on the per¬
ception of objectives and constraints, led to the formulation of concrete
action schemes or plan directives. In turn, these action schemes, with
some delay, led to the emergence of conjunctures not always anti¬
cipated, which in turn led planners and policy-makers to rethink their
objectives and strategies. There have consequently been elements of
change as well as of continuity from one plan to another. It would
therefore be a mistake to regard the Indian planning experience as
made of a whole cloth, although in comparison with most countries’
plans, Indian plans have displayed a much greater degree of stability in
2 Indian Planning: Basic Features and Analytics
conception. At the moment, there are indications that some major

directional changes may indeed be taking place. They are being
projected as ruptures with the past. Whether this is indeed the case is
not yet clear. In one of the chapters dealing with current issues of
policy, I try to assess how congruent these changes are with what has
been described as the ‘Indian approach’ to development planning; and
what is more important, whether these changes can cope with the
major challenges before the Indian economy.today.
In the very beginning, one may well ask why discuss Indian plans, or
for that matter the economic theory underlying Indian plans, at all,
especially today when there are signs of‘plan weariness’ in many parts
of the world, not excluding India. Economists of different doctrinal
persuasions have pointed out that planning has not proved a success.
Planned economies, it is claimed, are incapable of bringing about the
necessary structural changes at the right time and of the right magni¬
tude, although this is traditionally alleged as their rationale, and are
inefficient in distributing current stocks of productive factors among
competing uses. After all, is it not true that Deng Xiaoping, Rajiv
Gandhi, and even Mikhail Gorbachov are all engaged in getting away
from the strait-jacket of ‘planning’. ‘Economic reform’ is the key
phrase, and why not concentrate on it?
These questions are doubtless pertinent; they can no longer be dis¬
missed as unimportant, irrelevant, or merely ideologically motivated,
and I shall have to return to them at a later stage in my presentation.
But I believe that there are three majo'r reasons why Indian planning
needs to be discussed seriously. I shall first state these reasons very
briefly, and then proceed to elaborate them. The first reason has to do
with the nature of the ‘structural break’ that planning represents in
India’s development experience. The second reason has to deal with
the ‘analytical’ ideas underlying Indian plans as contributory factors to
the growth of‘development economics’ as a field of enquiry. The third
reason is, of course, none other than the classic issue of ‘market vs.
plan’, an issue of great contemporary interest on which Indian expe¬
rience throws some light.
Taking the first reason first, it cannot be denied that Indian plan¬
ning has brought about major structural changes in the Indian
economy, although not to the extent desired by the planners. To
understand what has happened to India over the last thirty-five years,
it is absolutely necessary to understand the objectives, targets, and
implementation procedures of Indian planning. To describe the story
Indian Planning: Basic Features and Analytics 3
of India’s planned development in terms of the logic of pressure-group

politics alone is, in my opinion, a very one-sided projection of a multi¬
dimensional reality, especially when the pressure groups have neither
stayed the same nor retained their relative importance in the decision¬
making process. Similarly, it is quite inadequate to deal with the same
story in terms of the logic of primary accumulation of capital. The
reason why this particular formulation is inadequate lies in its implicit
avoidance of the dialectic of ‘accumulation vs. legitimation’. While
Marx may have been justified in writing the history of the development
of productive forces in seventeenth- and eighteenth-century England
as a story of Ursprung liche Akkumulation, misleadingly translated as
‘primitive accumulation’ (although some would question the alleged
phenomenon both on analytical and empirical grounds), the post-inde¬
pendence experience of India has a basic structural difference.
Adoption of a representative form of government based on universal
adult suffrage did have an effect on the exercise of political power, and
so did the whole legacy of the national movement with its explicitly arti¬
culated set of economic objectives. Jawaharlal Nehru, chief architect of
Indian planning, was also the prime minister of India. He viewed plan¬
ning as a way of avoiding the unnecessary rigours of an industrial tran¬
sition in so far as it affected the masses resident in India’s villages.
While it is possible that he may have shared something of Marx’s views
on the ‘idiocy of rural life’, it should be remembered that he was also a
pupil of Gandhi, from whom he had learnt his basic lessons in political
mobilization which centred around the rural masses. Furthermore, he
viewed planning as a positive instrument for resolving conflict in a
large and heterogeneous subcontinent. Even staunch critics maintain
that Indian planning was a lively exercise for the first fifteen years of
India’s post-independence existence. While there may well have been
a structural break in the mid-sixties, planning has been practised, in
one form or another, right through to the present. Even to get away
from planning, one has to know what it has achieved.
It is well known that it was at Nehru’s initiative that P. C.
Mahalanobis, an eminent statistician and a man with a wide range of
intellectual interests, was persuaded to work out the blueprint for the
Second Five-Year Plan. This is still probably the single most signi¬
ficant document on Indian planning. It is also useful to remember that
Nehru himself helped to draft the introduction to the Third Five-Year
Plan, although this fact is not as widely known as it should be.
Moreover, Indian planning was, in the formulation of its theory, far
more self-conscious than that attempted in many third world

countries. The rise of development economics in the fifties as a serious
subdiscipline of economics, whose alleged demise has recently been
lamented by some and welcomed by others, coincided with the formu¬
lation of India’s first three plans.1 Almost all major contemporary
economists who took an interest in problems of development had
occasion to interact with India’s planners and policy-makers in the
fifties and the early sixties. Several of today’s Nobel laureates in
economics were among them, as well as many other distinguished
theorists.2 The result was a process of two-way interaction. Dominant
ideas of contemporary development economics influenced the logic of
India’s plans, and correspondingly, development theory was for a
while greatly influenced by the Indian case. H. Myint, an eminent
development economist, drew attention to this on several occasions.
While this relationship between development economics and Indian
planning did not generally persist later (there being too many dis¬
cordant trends within development economics itself, and far too many
vicissitudes within India and in the outside world), the Fifth Five-Year
Plan, especially in its draft form with its focus on poverty eradication,
reflected to a certain extent the same relationship. By looking at Indian
plans from an analytical perspective, we are therefore in a better posi¬
tion to judge some of the central issues in development theory and
planning.
Finally, the ongoing debate on ‘market vs. plan’ is also an issue
which can be somewhat better understood by a discussion of Indian
planning. I believe that the term ‘plan’ should distinguish between
planning as a form of ‘instrumental inference’ (to borrow an
expression from Adolph Lowe, the well-known German economist
who taught for decades at the New School for Social Research at New
York), and ‘planning’ as an alternative to a market system based on
‘command and fulfilment’.3 Similarly, the term ‘market’ also permits
different interpretations. It may be first viewed as a co-ordinating
system, or in the language of cybernetics as a ‘servomechanism’, and
secondly as an expression of an industrial system based on ‘consumers’
sovereignty’ judged as an ultimate value in itself. The first inter¬
pretation of the market can with justification be understood as an
implementational one, and not necessarily inconsistent with planning
as a mode of ‘instrumental inference’. In other words, it is perfectly
possible to allow the macro goals of a system and the principal action
directives to derive from a properly formulated plan, while its micro
Indian Planning: Basic Features and Analytics 5
analogues are left to be implemented through the market. There are, of

course, economists who will disagree with this proposition, but I
believe that they will do so because they do not make a clear-cut distinc¬
tion between the market mechanism as an efficiency promoting device
and ‘market’ as a process which has to be valued in itsef. While a large
literature has grown over this topic, I find that much of the discussion is
efficiency oriented. This includes Hayek’s contribution, even though
he does raise epistemological issues as well.4 However, it is not clear to
me that planning as a strategy can be easily dismissed on the grounds of
efficiency (in contrast with any specific strategy of planning), where
major structural changes are involved and where the ‘invisible hand’
can only be grasped through a very dark glass indeed.5
This is not the place to repeat the discussion of the relevant theore¬
tical issues, which I have presented elsewhere.6 However, a few points
relating to the Indian situation should nevertheless be reiterated. India
^adopted a specific strategy of planning to overcome what was at that
time widely believed to be the principal constraint on its growth
process: the shortage of capital stock in relation to the availability of
employable persons. This had both a structural dimension and a value
dimension, generally lumped together under the ‘savings constraint’.7
Indian planning in its initial phases was especially concerned with the
structural aspects of real capital formation. Today, the Indian
economy has overcome some of the structural deficiencies which
worried the early planners, but those deficiencies have not dis¬
appeared. Furthermore, the very pattern and process of growth has
introduced new problems. At the time the Fifth Five-Year Plan was
formulated it was widely felt that Indian planning had not paid suffi¬
cient attention to problems of poverty, and a strategy was sought that
would make a perceptible impact on poverty within a specified time-
frame. That strategy was not implemented, for a variety of reasons; so
the problem has remained, and requires serious attention.
Given India’s land-man ratio, its high rate of population growth,
and the deteriorating ecological situation, it is quite evident that tech¬
nological improvements which are land-saving have precedence over
many others. I am using the expression ‘land’ here to mean what
Ricardo meant when he talked about the ‘land constraint’. It is clear
that ‘land-saving innovations’ would require considerable investment
of other scarce resources, as well as an upgrading of labour skills. I
believe that no sustainable improvement in the distribution of incomes
is possible without reducing the ‘effective’ scarcity of land, which
involves the introduction of machinery of ‘land-esque’ type and/or

allowing for the productive use of human labour. This goes way
beyond installing the latest machines in a few selected sectors. A major
growth impulse is needed, and that implies wider-ranging action on
research and development in areas such as energy, crop husbandry,
and materials management.8 While I believe that efficiency in the use
of existing resources may be improved by greater autonomy of action
through introducing a variety of signals, including greater use of price
signals, there is a clear need for the ‘visible hand’ of planning, as many
of these problems involving expansion and modification of the
resource base itself require far-sighted action which is beyond the deci¬
sion horizon of private actors. What should constitute such a plan
would need to be discussed in very concrete terms. This would imply
an evaluation of alternative options, including an assessment of how
much risk we can afford to take on a number of issues, such as the
extent of transitional inequalities in the distribution of incomes, or
serious balance of payments disequilibria.
I shall have occasion to deal with some of these issues when we come
to a critical analysis of the policy matrix which is currently being
worked out. Meanwhile, in the next chapter, I propose to discuss the
genesis and articulation of a specific strategy of planning which is best
described as the Nehru-Mahalanobis strategy, and was most clearly
reflected in India’s Second and Third Five-Year Plans.
2
Foundations of India’s Development
Strategy: The Nehru-Mahalanobis
Approach
Genesis of the Nehru-Mahalanobis Approach
When the planning process was initiated in India, there was a legacy of
pre-independence debate on India’s development problems. This
debate centred around the Gandhian approach, at one pole, and the
‘modernizing’ approach of Nehru at the other. The Gandhian
approach has never been seriously discussed by either mainstream
economists or by its left-wing critics. There are good reasons for this
neglect as both sides share fundamental propositions regarding the way
one should view the central problematique of development. On this
point, differences between the mainstream theorists and their critics
have revolved around the role of the market system in bringing about
the desired quantum leap in the volume of accumulation and its distri¬
bution between sectors. However, both have largely accepted a
‘commodity-centred’ approach and the extremizing action directives
that govern the behaviour of economic agents. Thus, in either system,
more goods are preferred to less; and a higher level of capital stock per
worker has been considered unambiguously helpful in improving the
standard of living. While substantial differences have remained as to
who will bear the costs of accumulation, and also regarding the
character of the social support structure that the adoption of a techno¬
logical change may entail, the common ground between the two can no
longer be ignored, especially since the socialist planners of the 1980s in
China, Hungary, and even the USSR have been calling for market-
oriented reforms.
China under Deng is a particularly interesting example, where goals
of modernization have been closely tied up with the introduction of
market-oriented reforms through the introduction of ‘contract
systems’ in several major spheres of economic activity, notably agri¬
culture. In contrast with the basic tenet of Maoist economic policy
8 Foundations of India’s Development Strategy
which was presented as the development of a ‘socialist man’ based on

co-operative value orientations, emphasis in recent policy announce¬
ments has been placed on the development of a competitive spirit, and
particularly on greater availability of private goods, especially con¬
sumer goods. In Marxist terms, the sociological impulse behind the
changes can with some justification be described as the introduction of
a form of ‘ commodity fetishism ’. While it is possible to offer dissenting
opinions as to the compatibility of the present change in China with the
ideals of socialist construction (some would treat the whole thing as an
aberration), in my opinion, it seems to suggest that a more basic issue is
at stake here. In the present climate of opinion, in contrast with what
Marx himself may have thought about the objectives of socialism, the
idea of what constitutes a ‘ good life’ seems to be not significantly differ¬
ent between socialist and capitalist modernizers. Consequently, the
entire debate, at least in China, has for the time being been reduced to
one of how best to promote ‘productivity growth’—a concept which
gets increasingly complex as one moves from a subsistence economy to
a modern economy with an increasingly diverse assortment of goods
available for consumption.1 This is equally true of the ‘market
socialism’ which has been practised by Hungarian planners since the
late sixties with a certain measure of success.
In contrast, the Gandhian approach has always talked about the
voluntary limitation of wants, the need for having self-reproducing
village communities, and about issues bearing on a better balance
between man and nature. While the Gandhian approach has received a
certain measure of support in recent writings of ecologists and ecolo¬
gically minded economists, in the early fifties such positions appeared
to lack any substantive theoretical foundation. Gandhi and his
disciples looked more like moralizing old men than like people who
could be expected to change the direction of society. Thus the
modernizing school under Nehru won the day as their ‘scientism’
seemed more compatible with the ideological priorities involved in
building up a post-colonial nation-state, although some vestigial traces
of the alternative approach remain in the attitude to certain very small-
scale industries such as hand spinning, generally known in India as the
‘tiny sector’.
The first three five-year plans, which bore the personal imprint of
Nehru—and especially the Second Plan, which reflected a major
watershed in India’s economic thinking—are especially important as
attempts at giving concrete shape to the vision of transformation, social
Foundations of India’s Development Strategy 9
and economic, to which the modernizing elite subscribed.

I have presented Nehru as a modernizer par excellence. But some may
like to differentiate sharply between Nehru as a modernizer and, say,
J. R. D. Tata, one of the authors of the famous‘Bombay Plan’, which
projected a vision of industrial India even before the country became
independent. There is little doubt that as a modernizer, Nehru was
rather heavily influenced by the ideals of Fabian socialism. In fact, in
his famous pamphlet ‘Whither India’ written in the thirties, Nehru
talked in favourable terms about Soviet socialism much as the Webbs
did. The National Planning Committee set up by the Congress Party
of India, with which not only Nehru but also eminent scientists such as
M. N. Saha were associated, reflected a profoundly interventionist
economic philosophy. The deliberations of this committee undoubt¬
edly had an impact on the type of economic regime that India adopted
on gaining independence, which involved a variety of institutional
motive forces. That India under Nehru adopted a socialist framework
of economic policy in the mid-fifties doubtless owes something to the
ideological predilections of Nehru and some of his close associates, and
cannot be denied by any student of recent Indian history. But it may be
maintained that even a more pragmatically inclined politician than
Nehru could well have opted for the same set of arrangements for pro¬
moting economic development if his perception of the factors perpe¬
tuating structural backwardness conformed to what is described below.
Structural Constraints and the Development Strategy
The underlying causes of structural backwardness were perceived as

follows. First, the basic constraint on development was seen as being an
acute deficiency of material capital, which prevented the introduction
of more productive technologies. Secondly, the limitation on the speed
of capital accumulation was seen to lie in the low capacity to save.
Thirdly, it was assumed that even if the domestic capacity to save could
be raised by means of suitable fiscal and monetary policies, there were
structural limitations preventing conversion of savings into productive
investment. Fourthly, it was assumed that whereas agriculture was
subject to secular diminishing returns, industrialization would allow
surplus labour currently underemployed in agriculture to be more
productively employed in industries which operated according to
increasing returns to scale. A fifth assumption was that if the market
mechanism were accorded primacy, this would result in excessive
Foundations of India’s Development Strategy
10
consumption by the upper-income groups, along with relative under¬
investment in sectors essential to the accelerated development
of the economy. Sixthly, while unequal distribution of income was
considered to be a ‘bad thing’, a precipitate transformation of the
ownership of productive assets was held to be detrimental to the
maximization of production and savings. In other words, there was a
tolerance towards income inequality, provided it was not excessive and
could be seen to result in a higher rate of growth than would be possible
otherwise.
As this last point was to figure quite prominently in the debate of the
late sixties and early seventies, it may be worthwhile to stress here that
while Nehru and others did talk about letting the national cake grow
larger before an adequate standard of living could be provided for all,
they were not growth-maximizers in any sense of the term. A satis¬
factory rather than a maximum rate of growth would correspond more
closely to what they had in mind.
Given all these perceptions, it was felt that economic theory indi¬
cated that the basic questions relating to how much to save, where to
invest, and in what forms to invest could be best handled with the help
of a plan. It will be noted that the economics profession in the fifties,
especially during the early and middle part of the decade, subscribed to
most of the perceptions presented above. It is enough to recall Arthur
Lewis’s famous dictum that the central issue for development
economics was to understand how a country which saves 5% of its
income is transformed into one which saves 20% of its income. The
same view was expressed by A. K. Das Gupta, a prominent Indian
economist with a classical bent^f mind, who defined India’s problem
as one of ‘ primary accumulation of capital’. Apropos the distinction in
the growth problem between developed and developing economies, he
wrote that in the former ‘it is a follow-up of the Keynesian theory of
under-employment equilibrium and leads up to models of steady
growth. The latter is a problem of “primary accumulation” and leads
to models of accelerated growth.’2 On the third proposition, agree¬
ment was not so universal. While structuralists like Prebisch would
have endorsed it, for most economists it was an empirical question.
However, quite a few would have subscribed to Nurkse’s ‘export lag’
thesis, especially because of the heavy weight of primary products in
India’s export basket.3 Furthermore, the sharp fall in commodity
prices after the Korean War also added to the plausibility of that pro¬
position. But the export lag thesis leads to a proposition for balanced
growth, while Indian planners were talking about the primacy of
industry and particularly of heavy industry. The reason is that in con¬

trast with Nurkse, who worried about horizontal inter-relationships,
Indian planners were much more concerned about vertical inter¬
relationships. The fourth argument was initially set forth by Allyn
Young in his justly famous article on increasing returns and economic
growth. In the post-war period, continuing the original empirical work
of P. J. Verdoorn, N. Kaldor has done much to emphasize the need for
fast rates of growth in manufacturing production for promoting a
‘virtuous circle’ of growth.4 The fifth argument is the ‘market failure’
argument, which has been so extensively treated in the literature that
we need not deal with it here. Finally, in regard to the tolerance of
inequality, not only did it reflect a convenient value bias of the elite,
but it formed the staple of much of the classical theorizing on growth
adopted by the economics profession with the exception of Paul Baran,
who came to the conclusion that 15% of India’s national income could
be invested without any reduction of mass consumption.5
It will be observed from the above that the Indian planners sub¬
scribed to a basically supply-side view of the planning problem. The
argument that domestic demand can possibly be a constraint on the
growth process was not even mentioned as a hypothesis that needed to
be rejected. The reason, presumably, was the belief that with an active
state policy on investment, all possible slack in the economic system
would be utilized. Statically considered, the argument was right.
There was little Keynesian-type unemployment in India in the early
fifties. There was consequently justification for concentrating on
factors promoting savings or productive accumulation. Indian
planners could at that stage maintain that what mattered most was
growth in the aggregate level of investment and that, dispropor-
tionalities apart, the growth process was unlikely to lose steam so long
as public investment was growing at a fast pace.6 That led them to look
into areas where public investment could be more fruitfully deployed,
in the long term. There were three major possibilities which could be
expected to balance supply with demand along a growing trend line.
First, public investment would be concentrated in the area of infra-V
structure. Secondly, public investment could be directed primarily
towards agriculture. Thirdly, public investment could be directed
towards industrial development. Indian planners obviously did
attempt all three, as any reasonable planner can be expected to do in
such situations. The First Five-Year Plan (1950-5) focused on the first
two types of investment. At the time of the Second Five-Year Plan 1
(1955-60), however, a major change was brought about. As already

pointed out, Indian planners operated on the assumption of a low
elasticity of export demand accompanied by a system of strict import
allocation. Thus they were in reality operating on the assumption of a
nearly closed economy.7 In such an economy, if savings were to be
substantially raised from a low initial level of around 5% in 1950 to
20% in 1975, inter-sectoral consistency over time would demand that
the productive capacity of the capital goods sector would have to rise at
an accelerated rate to convert growing savings into additional real
investment. It was therefore the need to raise the real savings rate that
led Indian planners to accord primacy to a faster rate of growth in the
capital goods sector, although doubtless there could have been other
considerations such as building up defence capability.
The Second Five-Year Plan, which was heavily influenced by the
work of Mahalanobis, reflected to a much larger extent the necessity to
build ahead of demand in the area of capital goods production. The
Mahalanobis strategy, which deviated from the ‘textiles first’ strategy
of industrial development followed by a successful late-comer in
industrialization like Japan, was the object of a great deal of critical
comment. Mainstream economists found it an unjustified departure
from the principle of ‘comparative advantage’, while those who were
impressed by the Soviet model of industrial development thought that
the avowed priority for the capital goods sector corresponded to the
logic of accumulation enunciated by Marx in his models of expanded
reproduction.
Looking at the debate from the vantage point of the eighties, it can
be seriously maintained that both sides overstated their respective
cases. The proponents of ‘comparative advantage’ took a much too
myopic view of the growth process, especially taking into consideration
India’s size, resource endowments, and the existing trade oppor¬
tunities. On the other hand, while the Mahalanobis model contained
an important insight into the dynamics of a disaggregated growth
process (a point to which I shall return), that insight by itself did not
permit far-ranging conclusions to be drawn about the primacy of the
capital goods sector irrespective of initial conditions and social valua¬
tion of consumption at different points in time. Most importantly, if
the inability to employ more people productively depended as much on
the absence of suitable ‘machines’ as on the shortage of ‘food’, the
workability of the model, as distinguished from its analytical contri¬
bution, depended on an adequate and effective policy frame for agri-
culture, which was absent from the Second Five-Year Plan. This is a
point to which I shall return in Chapter 3.8
From the angle of political economy, the Indian planning exercise is
often viewed as a variant of the Soviet planning model. I am of course
referring here to the decade of the fifties, especially the late fifties. That
Mahalanobis himself saw the matter in this way is borne out by the
following statement, which he made in a paper hardly commented on
in the western literature. This, incidentally, is also the only place where
he compares his own work with that of Feldman, a Russian economist
of the twenties whose work was popularized in the mid-fifties by E. D.
Domar. Mahalanobis wrote while referring to his own model of
growth,
A model of exactly this type was developed by Feldman in 1928 in the

U.S.S.R. A summary of the paper in English is available in Domar’s essay in
the Theory of Economic Growth. The Indian work, however, was done completely
independently of Feldman’s findings. It is interesting to note that the impetus
of planning initiated almost identical lines of thinking in the two countries, the
U.S.S.R. and India.9
Let us note that Mahalanobis does not talk about the political economy
of backwardness as responsible for the convergence of the Russian and
Indian lines of thinking, but the ‘impetus of planning’. Obviously, he
had in mind the so-called primacy thesis of the capital goods sector,
which he thought to be logically deducible from the two-sector model of
growth that he had formulated in his paper in 1953; a policy which was
also advocated by Feldman, and adopted by the Soviet Union during
the Stalinist period.
Was Mahalanobis right? Were the two lines of thinking ‘almost
identical’? We have already said that the priority argument for the
capital goods sector does not necessarily follow in all situations. As
there is a very considerable technical literature on this question, which
I have discussed elsewhere, it is not necessary to enter into these issues
here.10 What is of importance here is that there was a certain homology
between the Soviet ec'onomic situation in the twenties and the Indian
situation in the mid-fifties. That homology pertained to the situational
logic inherent in the problems faced by late-coming nations seeking to
industrialize quickly. The argument gains greatly in plausibility when
one talks about countries of the size and resource diversity of the USSR
and India. Alexander Gerschenkron had talked about such a logic in
the context of enunciating his principle of ‘recursive backwardness’.
In conceptualizing Soviet growth models of the twenties, the
expression ‘socialist model’ is frequently employed. For certain

purposes this may not be inappropriate. For our present purposes, if
we replace ‘socialist’ by ‘modern’, and recall that before collectivi¬
zation was carried through, petty production was nearly universal in
agriculture in Russia, the similarity between the two situations
becomes quite evident. Add to this that the assumptions regarding
foreign trade were roughly the same in both cases, and we are then led
to the convergence in lines of thinking that Mahalanobis talked about.
Up to a point, it is therefore quite possible to uphold the
Mahalanobis line of reasoning even without talking about the more
doubtful thesis on which much ink has been spilt, namely, ‘the priority
for the rate of growth of Department of 1’. I would, however, like to
maintain that this comparison cannot be stretched too far. This
becomes quite apparent when account is taken of the multiplicity of
pressure groups which existed in Indian society: in particular, the
existence of rather large capitalist combines, rich landowners, and a
very powerful middle class. Unlike the Russian revolution, the Indian
independence movement and the subsequent transfer of power did
nothing significant to curb the pre-existing power of these groups.
What they did do, and this is not unimportant, was to curb their poten¬
tial rate of expansion in a newly independent country. As I have
pointed out already, Nehru sought to forge a more complex relation¬
ship with these groups, involving elements of strategic support as well
as restraint. The possibilities and limitations of this approach were not
clearly perceived at the time.11
From the vantage point of today, the Indian development model of
the mid-fifties is probably better viewed as a variant of the Lewis
model.12 The variation relates to the two-sector disaggregation intro¬
duced by Mahalanobis, as well as to the active role allotted to the state.
In the original Lewis model, the principal actors were the capitalists in
the ‘modern’ sector, but in the Indian case a development bureaucracy
was also assigned a major role. Whether this latter substitution affected
the growth process in an essential way is an issue that will be discussed
in the chapter on plan implementation.
The adoption of a mixed economy framework with the private sector
and the state competing for scarce resources made finance a major
problem in its own right: a quasi-bottleneck, to use Kalecki’s expres¬
sion.13 Lewis had found the solution to the financing problem in the
accumulation of profits which were to be reinvested to generate
growth. Profits arose in the sphere of production. In the Russian model
as practised during the twenties, the situation was more complex

because industry and agriculture operated according to different
ground rules. There was indeed a genuine financing problem after the
introduction of the New Economic Policy.
Both Bukharin and Preobrazhensky, principal contestants in the
debate that raged at that time in the Soviet Union, recognized this
problem. Preobrazhensky’s formulation of the principle of ‘socialist
primitive accumulation’ during the 1920s was only an expression of
the idea that the socialist state, like the Indian state, had to find sub¬
stantial real resources for accumulation. It differed from Bukharin’s
primarily in the pace at which the accumulation process could be
carried out. While Preobrazhensky may be said to have thought more
along ‘maximalist’ lines, Bukharin was more inclined to think along a
more proportional growth path (a possibility not unlike what India
could have hoped to attain if the state were more powerful as well as
more deft).
In the Indian case, having ruled out the juridical change in the status
of productive assets, the state was thinking in incremental terms. A
modern, capital-intensive industrial sector was to be created side by
side with private agriculture, with the continued functioning of a
private industrial sector confined to relatively labour-intensive, light
consumer goods. There was, therefore, an assumption of a mixture of
industrial motive forces which were supposed to act in a synergistic
manner.
The financing pattern adopted in the fifties was not an act of over¬
sight but a deliberate choice, rooted in what Indian planners believed
to be an egalitarian policy mix. The idea was that accelerated invest¬
ment was likely to create large profits which should be re-invested. It
was alright to encourage the private sector to display its incentive to
maximize production so long as it was possible to tax it sufficiently; or
even to raise low interest loans as long as it was understood that in the
course of time, the state or public sector was going to be largely self¬
financing.
In my discussion so far, I have barely touched on the theme of‘trade’
as an engine of growth. Why did Indian planners ignore the trade
option as a major source of growth? The issue was posed at the time the
Second Five-Year Plan was formulated. A projection of the balance of
trade was attempted in the plan document, and the planners con¬
cluded that no significant increase in export earnings in the short run
could be expected. However, they recognized that ‘it is only after
industrialization has proceeded some way that increased production

will be reflected in larger export earnings’.14 That this argument was
considered reasonably sound is indicated by the conclusions Sir
Donald McDougall reached when he was asked to advise the Planning
Commission in the early sixties on the balance of payments problem.
Sir Donald was of the opinion that ‘India with potentially cheap steel
and low wages should in time be able to compete abroad over a wide range
of manufactured goods’ (my italics).15
What could have been the basis for short-run export pessimism?
Even if demand for primary products were assumed to be strongly
inelastic, there was obviously a major manufacturing sector which
India could have developed for export purposes—cotton textiles.
Planners expected the export of cotton piece goods to increase from 747
million yards in 1955 to 1,000 million yards in 1960, not a spectacular
increase considering that the country had exported 867 million yards in
1954. Looking back, it would appear that India could certainly have
placed greater emphasis on the cotton textile sector. There may be
different explanations for this neglect. But the usual explanations,
given in terms of the absence of a natural resource base (because of the
poor quality of cotton grown in India) or an emphasis on maximizing
home consumption rather than on earning foreign exchange are
inadequate, even though there is some basis for these judgements. I
believe that the reason was basically political. Emphasis on textile
exports would have required supporting a particular regional group of
industrialists at the expense of others. Furthermore, there was the
Gandhian legacy which viewed the textile sector as pre-eminently
suited to small-scale initiative. This became an issue in the debate on
the choice of techniques to which many notable contributions were
made.16 In his famous four-sector model, Mahalanobis wanted to
define a ‘dual development thesis’ (which Mao Ze-dong called
‘walking on two legs’), whose purpose was to combine high employ¬
ment growth with building up a capital goods base. In the context of
employment generation, he too assigned an important role to the
highly labour-intensive part of the textile sector. This precluded a fast
rate of growth in a modern textile industry.17
The argument, briefly, was as follows. The development of a heavy
capital goods base over a period of time would lead to the diversifi¬
cation of the export basket in the direction of manufactured goods,
including machinery and equipment; while the increase in employ¬
ment, leading to an expanded demand for consumer goods, would be
met by pursuing ‘capital-light’ methods of production. That this would

not enable India to be competitive in the world market for textiles was
considered to be a short-term adjustment problem.18
As it happened, the needed increase in the production of consumer
goods did not materialize. This posed a serious problem, especially in
regard to food grains and cotton. Furthermore, while Mahalanobis
had expected the learning effect to gradually diminish the cost of
production of capital goods, this did not happen either. In addition, the
economy received several severe jolts, some of which were exogenous
and unrelated to the development strategy, the most notable one being
the outbreak of border troubles with China in 1962.
Can we conclude from these facts that the strategy was devoid of
analytical and policy significance? I think that such a conclusion is not
warranted.
The analytical significance of what was attempted by the Indian
planners during the Second and Third Five-Year Plans could be best
brought out by linking the core theoretical argument with the theory of
traverse recently brought into the foreground of discussion by Sir John
Hicks in his perceptive reinterpretation of the ‘machinery question’
which Ricardo had added in the third edition of his Principles. Professor
Hicks has not merely shed analytical light on this old and vexed
question, he has also provided lucid historical insight. But his mode of
analysis was what he calls ‘neo-Austrian’.19 What Indian planners,
notably Professor Mahalanobis, had in mind could be put more easily
in the language of traverse analysis developed by Adolph Lowe. His
formulation, like that implicitly formulated by Professor Mahalanobis,
is strategically centred on the relationship between three major groups
of industries: consumer goods, capital goods for producing consumer
goods, and capital goods for producing capital goods.20
How the relationship between these sectors changes over time, even
with unchanged technology and less than abundant natural resources,
is at the heart of the problem of economic growth for a developing
economy. For a small open economy enjoying very favourable demand
conditions, this problem of transition can be significantly eased by
utilizing trade possibilities, but I doubt whether India can be fitted into
such a framework. Criticisms which have been made on this score
appear to me greatly overstated. I do however believe that there were
two major limitations to the Indian plan exercise. First, the treatment
of prime consumer goods, such as food, was highly optimistic. This
and the distortions created thereby will be treated in Chapter 3.
Secondly, discussion of what Lowe would call ‘force analysis’ was not
sufficiently realistic. This means that the role of the planning process
was viewed much too simplistically. The most frequently heard criti¬
cism—that the fault with Indian planning lay in a high degree of
centralization of investment—seems to miss the mark. Subsequent
developments showed that a more important reason was that insuffi¬
cient attention had been paid to the problem of how to obtain resources
for public investment purposes while encouraging the growth of
incomes in private hands.
So long as the growth of the agricultural sector could be viewed as a
low-cost option and a reasonable volume of net aid was available, these
problems did not surface much. But from the mid-sixties onwards
these conditions were to change significantly. Discussions on the ‘crisis
of Indian planning’ in the late sixties put a lot of emphasis on ‘urban
bias’ and ‘neglect of foreign trade’. These discussions, as I look back,
were often overstated, but they had a point: the failure to consider the
full set of logical implications of what accelerated growth implies in the
context of a mixed economy.
The achievements of the first three plans were not insignificant,
although they fell short of expectations. Among the achievements, one
can mention a great deal of diversification within the industrial
structure, a significant upgrading of the skill base of India’s popu¬
lation, and a turnaround in the long-standing stagnation of Indian
agriculture because of a large step-up in irrigation investment.
Amongst the failures, one has to admit the underestimation of the
import-intensity of the import substitution process. This showed that
the process of industrialization had ignored certain important issues
relating to the phasing of investment outlay. But probably more
importantly, the inability to carry out effective land reform in the early
fifties when conditions had been reasonably opportune, along with the
maintenance of the largely unchanged input base of traditional agri¬
culture, meant that the agrarian transition was left largely incomplete.
Methods adopted to tackle this problem from the mid-sixties
onwards when the vulnerability of Indian agriculture was exposed will
be taken up in the next chapter.
3
Vicissitudes in the Career of a Strategy
The Development Strategy in Operation: 1950-65
The first three five-year plans of India are generally treated separately
from all the others. There are two good reasons for this: first, they were
successive in time, together spanning a period of fifteen years; and
secondly, and more importantly, they were all formulated under the
active chairmanship of Jawaharlal Nehru. This last fact is doubtless
important from the point of view of explaining the seriousness with
which the planning effort was treated at home and abroad. From a
purely analytical point of view, however, the First Plan was not a plan
in the sense of constituting an internally co-ordinated set of investment
decisions. This point has been noted often enough, although on occa¬
sions the First Plan has been praised as the most successful because its
very modest (12%) targeted increase in national income over the plan
period was surpassed in execution, largely because the production of
food grains (cereals and pulses) increased from around 52 million
tonnes to 66 million tonnes.1 The plan had emphasized public irri¬
gation as a leading input into agriculture, but otherwise its diagnosis
and solution for the development problem ran along very conventional
lines.
The real break with the past came with the Second Five-Year
Plan. This saw the articulation of what may be called the Nehru-
Mahalanobis strategy of development. This strategy, as we have seen,
lacked neither a theoretical rationale nor a measure of empirical plausi¬
bility. It was primarily a strategy of industrialization which hoped to
succeed by forging strong industrial linkages, both ‘backward’ and
‘forward’. In this respect the strategy seems to have worked, at least for
a time. The rate of growth of industrial production was impressive.
The Third Five-Year Plan noted that the general index of industrial
production rose from 139 in 1955/6 (1950/1 as base) to 194 in 1960/1.
20 Vicissitudes in the Career of a Strategy
It also noted that the machinery index, which was 192 in 1955/6,
increased to 503 in the corresponding period. Considerable though less
spectacular growth was observed in iron and steel and chemicals. How¬
ever, a very discordant note was struck by cotton textiles, which rose
from 128 to only 133 in 1960/1. Even after allowing for differences in
the base lines of different industries as well as differences in coverage,
these figures seem to indicate disproportionate growth of the heavy
industries sector, which was more striking than the planners may have
initially bargained for. However, of more immediate concern for the
planners was their underestimation of the imports needed to achieve
the process of transition to self-reliant growth. They concluded on the
basis of their analysis that this reflected merely a ‘hump’ which could
be surmounted if suitable foreign assistance was available for a period
of ten to fifteen years. The planners admitted that ‘the general pattern
of development followed in the Third Five-Year Plan necessarily flows,
in large part, from the basic approach and experience of the Second
Five-Year Plan’. They then went on to add that ‘in some important
respects it represents a wide view of the problems of development and
calls for both more intensive effort and a greater sense of urgency’.
Among the priorities listed in the Third Five-Year Plan, it was
recognized quite explicitly that agriculture had the first place. Thus, in
its initial formulation at least, the Third Plan seems to differ from the
Second. It was obviously thought both logical and necessary to modify
the original Mahalanobis formulation to accord priority to a sector
which could not be classified under his Department 1, namely, the
‘heavy capital goods’ sector. It is not, however, clear from the plan
document and discussions which took place around that time whether
the planners had fully comprehended the nature of the changed
priorities and their lack of congruence with the Second Five-Year Plan
strategy.
Facts suggest that compared with the First Five-Year Plan, there was
a relative de-emphasis on agriculture in the Second Five-Year Plan.
There is no doubt that this was so in terms of investment allocation
ratios, both planned and realized. Economists, both within India and
abroad, often claim that this implies an urban bias at the root of India’s
development planning which was especially pronounced in the Second
Five-Year Plan and not significantly different in the Third. Reference
was made earlier to the Soviet debate of the twenties between Preo¬
brazhensky and Bukharin. We saw that while the comparison should
not be stretched too far, there was some similarity in perception
Vicissitudes in the Career of a Strategy 21
between the principal Soviet theorists and the major architects of

Indian planning, especially Mahalanobis. I even quoted from a paper
of Mahalanobis which shows that he himself was not unaware of this
similarity. But I believe that Indian planners were not principally
thinking in terms of extracting ‘surplus’ from agriculture for financing
investment in industry. What they effectively did was to treat agri¬
culture as a ‘bargain sector’ ,2 They were aware that major institutional
changes were required in order to realize the production potential of
agriculture, but they did not realize the nature and dimension of poli¬
tical mobilization that would be necessary to bring about the necessary
institutional changes. The Second Five-Year Plan document included
a very well written chapter on ‘Land Reform and Agrarian Reorgani¬
zation’, which went beyond the mere enunciation of a redistributive
strategy for land to the articulation of what could form the basis for a
progressive agrarian structure. It is on this latter dimension that hopes
were placed for bringing about the envisaged increase in agricultural
output, particularly by those who, like Nehru, saw co-operative far¬
ming as the ultimate solution. Such people believed that the proposed
programme of community development and national extension would
constitute an essential catalyst in this process, along with irrigation
financed from public budgets.
Thus, while it would be inaccurate as well as unfair to say that the
Second and Third Five-Year Plans were lacking in an agricultural
strategy,3 it would not be unwarranted to maintain that planners were
grossly over-optimistic as to what traditional Indian agriculture, with
its conventional input-output basis and deep-seated social strati¬
fication, could do within the constraints set by the political changes
which the Congress Party was able to engineer. In actual fact, the
planners’ strategy boiled down to- the traditional thesis, upheld by
several contemporary scholars of economic development, that during
the early stages of industrialization it was necessary for agriculture to
contribute to the building up of a modern industrial sector by pro¬
viding cheap labour and also cheap food. Along with increasing pro¬
ductivity, this in turn would help in maintaining a low ‘product wage’
in the industrial sector.4 The relationship between maintaining a low
product wage and a high level of accumulation was assumed to be
strictly positive. While this whole sequence of reasoning was not
explicitly stated in any plan document, it can be deduced as a corollary
from many contemporary discussions.5 In an attempt to explain why it
was wise on India’s part to go into an agreement with the United States
on the large-scale import of food grains under PL480 (which enabled

food grains to be imported, largely against payment in rupees and
partly as a gift), Dr S. R. Sen, to whom reference has already been
made, stressed the great importance of maintaining a ‘cheap food
regime’ for promoting growth in India. Properly elaborated, Sen’s
thesis would not be different from the logic given here.6
In fact, the disincentive effects of specific commodity imports on
such a large scale were raised at that time, only to be dismissed by the
official response that with sufficient increases in the level and the rate of
public investment, there was an assured prospect of rapidly expanding
home markets for principal commodities such as wheat, cotton, and
edible oils.
Things did not work out quite the same way. Indian planners had
underestimated the time lags involved on the production side in
industry, as well as the need to bring about a large-scale shift in the
input-output ratios in traditional agriculture. However, through PL
480 imports as well as through irrigation-induced increase in food
production, they succeeded in maintaining a low rate of price increase
(around 2.5% per annum), which helped to maintain a sort of social
equilibrium in the urban areas. Social peace was further promoted by
rapid increase in urban employment. Meanwhile, there was not much
evident sign of unrest among the peasant classes as the expansion of the
area cultivated even under traditional technology had led to a non-
negligible increase in rural incomes, at least in major agricultural
states such as the Punjab, Andhra Pradesh, and Tamil Nadu. Uttar
Pradesh, the largest state, which did not show any significant
increase in agricultural production, nevertheless benefited from cer¬
tain land-reform measures, such as the abolition of intermediary
tenures.
There were two major exogenous shocks which did a great deal to
upset the general optimism about Indian growth, which in turn led to
substantial changes in agricultural strategy both in fact as well as in
formulation. These were the sharp increases in defence spending after
1962, and the two successive monsoon failures in 1965 and 1967 which
led to catastrophic declines in food production.7 The first shock led to
severe cut-backs in public investment, putting the ‘acceleration prin¬
ciple’ into reverse,8 and leading to the emergence of significant excess
capacity in the heavy and capital goods sectors. While the immediate
impact of the disaster on the food front was mitigated by additional
large-scale imports of US wheat, it was quite clear that a basic
imbalance had arisen between the demand for food and the supply of
food, which was the combined result of acceleration in the rate of popu¬
lation growth, exhaustion of the possibilities for increasing the culti¬
vated area, and the diminished effectiveness of regional crop
specialization.9
The government’s first response was to abandon the method of five-
year planning in favour of annual plans, which were relatively modest
budgetary exercises. A second response—sharp cut-backs in public
investment—inevitably dampened the economy in that it led to
reduced demand for a whole range of products produced by the private
sector.
A draft Fourth Five-Year Plan had been abandoned in 1965/6 along
with an ambitious perspective plan drawn up under the influence of
Pitambar Pant, an intellectual disciple of Professor Mahalanobis and a
close supporter of his strategy within the Planning Commission. In its
place, as already mentioned, annual plans were introduced to retain a
very limited amount of development orientation in the annual
budgets. There was no attempt at any methodological innovation in
these plans, but the ‘annual plan’ period was significant for two
reasons. First of all, annual plans brought out into the open one of the
major weaknesses underlying Mahalanobis’s strategy, namely, the
idea that what was physically possible and desirable could also be
rendered financially feasible. Mahalanobis and his colleagues, notably
Pant, had maintained that material balances for all the key commo¬
dities constituted the chief operating document in any plan. While
there was always a powerful group within the government which did
not agree with this view, especially within the Finance Ministry and to
a much smaller extent within the Planning Commission, they had a
rather simple quantity-theoretic view of price level dynamics. But the
experience of inflation in the mid-sixties, coupled with the govern¬
ment’s reluctance to step up investment lest it trigger off inflationary
price expectations (in spite of the existence of significant excess capa¬
city in the equipment goods sector), brought home the lesson
that the problem of how best to finance a plan required very careful
attention.
It had been pointed out by Kalecki in a paper that he wrote when he
visited India in 1960 that for any rate of growth of national income
there must be a corresponding rate of growth in the supply of neces¬
sities. He further stated in this paper, which was first published in the
Economic Weekly in J uly 1960, that
a sound financial policy must be based on two very different elements:

(a) A correct proportion between the rate of growth of the national income
and that of the supply of necessities,
(b) A policy of taxation which would restrain the consumption of non-
essentials to the extent that would provide sufficient resources for the
financing of investment.10
While Kalecki’s recommendations did not make much impact at the

time they were written, his proposition (a) acquired an overwhelming
plausibility after the evident slowing down of the rate of growth of food
production. I have to add here that his proposition (b) is yet to be fully
grasped, and this is a point to which I shall return in Chapter 4, which
deals with the present framework of policy-making.
New Agricultural Policy: Characteristics and

Consequences
To overcome the ‘agricultural stagnation’, a new strategy of agri¬

cultural development was formulated during the ‘annual plan’
period. This strategy carried over into the Fourth Five-Year Plan,
which was finally adopted in 1969 under the intellectual leadership
of D. R. Gadgil, an eminent economist with a deep interest in the
problems of Indian agriculture.11
The new policy marked a notable shift in the perception of what
constituted the crucial constraint in the agrarian sector. Earlier
theorizing had maintained, as we have noted, that it was basically the
absence of knowledge of appropriate agricultural practice, along with
the maintenance of an obsolete social structure, which prevented
increases in agricultural production. Land reform was considered very
important, at least in principle; in practice the issue was largely
evaded. The new strategy seemed to deny the critical importance of
land reform even on the level of principle. Instead, emphasis was
shifted towards technological modernization. It was also openly
admitted that it was essential to ‘bet on the strong’, to recall Stolypin’s
famous expression in a somewhat different context, if the rate of
growth of agricultural production was to be revived. Based on recently
released papers of Lyndon Johnson, some commentators maintain
r that President Johnson lent a helping hand to the new strategy by with¬
holding orders for the shipment of grains to India pending India’s
adopting a new package of policies comprising the following set of
measures:
1. a shift in emphasis from ‘major’ to ‘minor’ irrigation works, which

implied largely a shift from publicly financed large irrigation
projects to small tube wells and energized pump sets;
2. adequate provision of ‘credit’ to those who were considered to be
credit-worthy, which in effect meant the large farmers;
3. an alteration in the input base of agriculture, which meant an
increase in the rate of fertilizer consumption along with commer¬
cial sources of energy, such as electricity and diesel oil; and
4. the development of fertilizer-sensitive varieties of grains.
The new strategy seems to have had a very impressive effect in the case
of wheat, but it is not possible to discern a similar effect on other crops,
at least in the earlier years—and even with wheat, the impact was most
pronounced in states already well endowed with such infrastructure as
adequate roads, market towns, co-operative credit societies, and above
all, good irrigation coverage.
Much has been written on the social effect of the Green Revolution
and its effect on rural inequality. This is not the occasion to go into an
evaluation of a whole mass of polemical and contradictory literature.
But several points need to be made here concerning certain irreversible
changes produced within the Indian economy which pose problems for
the future of Indian planning.
First of all, there was an increase in the use of purchased inputs in the
agricultural sector, which meant that agriculture-industry linkages
were now two-way to a much greater extent than ever before. This
meant that the block-angular character of the input-output matrix,
which had formed the basis of some influential theorizing within India,
was going to be less relevant in future. In concrete terms, this meant
that while the input flow from agriculture to industry could be expected
to continue, the need to ensure flows from industry to agriculture could
no longer be ignored,12 even though in the earlier stage the input base
of agriculture was largely provided by the agriculture sector itself. This
will be evident from Tables 23 and 24, which describe the input-output
structure of the Indian economy for the years 1968/9 as well as 1973/4.
Further, Tables 25 and 26 reflect the changes in direct and indirect
input requirements per unit of output in various sectors for those two
years. These tables, therefore, are of considerable importance to an
understanding of the structural changes going on in the economy.
Secondly, the monetization of Indian agriculture increased drastically
as a far greater proportion of output began to be exchanged against
money. Thirdly, introduction of a price-support policy on a fairly
remunerative basis, initially for wheat and later for other crops, intro¬
duced a downward rigidity in agricultural prices: it was no longer
possible to assert that agricultural prices were merely a matter of
supply and demand as they became part of the wider political process..
Finally, significantly greater use of energy and of oil-based fertilizers
not only changed the cumulative capital-output ratio of agricultural
production in India, but also made it far more sensitive to fluctuations
in the world market—and particularly in oil prices. It is sometimes
added that the Green Revolution led to undue mechanization of agri¬
culture, especially in the northwest. There is little doubt that certain
types of capital goods, such as diesel and electric pump sets, increased
very substantially, and so to a lesser extent did the use of tractors. But
to use A. K. Sen’s felicitous expression, much of the capital was ‘land-
esque’ rather than ‘labour-esque’.13 As a result, the Green Revolution
did not lead to the type of labour displacement from agriculture which
was predicted by some, mostly radical, economists. In fact, the
increase in capital intensity in Indian agriculture, especially during the
1970s, has helped to achieve an increase in output per unit of land as
well as per agricultural worker, in the face of a severe land constraint
and rising agricultural population (see Table 15).
However, consequent upon the Green Revolution, the change in the
character of the exchange relationship between industry and agri¬
culture, as well as the change in methods of production in areas where
crops such as wheat and rice (wheat more particularly) were rapidly
expanding, led to the emergence of a changed distribution pattern in
incomes, savings, and consumption. This is reflected in the statistics
relating to the rates of growth of certain types of durable consumer
goods, the growth of rural investment in financial assets, and an
increase in the share of subsidies in the government budget.
Agronomists who took part in the development of hybrid varieties of
seeds initially obtained from Mexico and the Philippines were of the
opinion that the ‘seed-fertilizer’-based technology was basically size-
neutral. It was claimed that unlike the traditional forms of mechani¬
zation, which were spearheaded more by engineers than by geneticists,
the new technology could be profitably used by both small and large
farmers. This was because items such as seed, fertilizers, pesticides,
and electricity consumption were all in principle divisible. The scale-
neutrality assumption therefore appealed to many economists as well.
However, this line of argument forgot to take into account two crucial
features of the new technology. One was that the necessary capital had
to be obtained on the basis of market transactions. Apart from seed, the

working capital requirement in traditional agriculture took the form of
‘wage advances’ along with organic manure obtained from the farm
itself. These assumptions were no longer valid; even leaving out irri¬
gation pump sets and so forth, the working capital requirement per
unit of output was higher for the new technology. Secondly, given the
gross inequalities in the credit delivery system, this meant that only the
well-to-do farmers could make the most profitable use of the new pack¬
age of measures. The machinery of government was not structured to
overcome the basic deficiencies from which the small farmers suffered.
Thus, while the Green Revolution increased output, it conferred
more than proportionate benefits to the better-off farmers in the infra-
structurally better endowed regions. It certainly broke the stagnation,
which had assumed worrying dimensions, but it did so at the price of
increased polarization within the countryside. Furthermore, there was
the fear that ‘mechanization’ in the ‘labour-esque’ sense was bound to
develop over time, leading to labour expulsion from agriculture and
greater rural-urban migration. Unless industrial demand for labour
was going to increase substantially, there was apprehension of greater
urban unemployment. These fears have not proved altogether base¬
less. They were to form the basis for a reformulation of development
strategy in the early seventies.14
Distributional Aspects in the First Three Plans
It may be useful at this stage to clarify the distributional premisses

underlying the Indian plans, especially the Second and Third Five-
Year Plans which rested on the Nehru-Mahalanobis strategy of
development.
It is sometimes maintained, and with some reason, that Indian plans
have ignored issues relating to the distribution of incomes. I say ‘with
some reason’, because the central analytical models, as we have seen,
pertained largely to issues relating to capital accumulation under
conditions of structural backwardness. But to say this is not the same
thing as saying that distributional issues were not articulated at all in
the planning documents. In fact, neither Nehru nor Mahalanobis had
forgotten to address themselves to issues of a distributional nature. In
his famous ‘Approach’ paper, Mahalanobis mentioned three major
issues of policy as deserving of serious attention, even if short-run pro¬
ductivity gains were not particularly great: education, health, and land
redistribution. On the issue of land redistribution he had written,

‘Such redistribution would not necessarily lead to an increase in pro¬
ductivity but it may still be worthwhile because of the social and
political benefits which would accrue from it. ’ Further, he was worried
about the premature mechanization of agriculture as well as of light
consumer goods industries, at least in part from distributional con¬
siderations. In the Third Five-Year Plan, whose first chapter, ‘Objec¬
tives of Planned Development’, was at least partly written by Nehru
himself, distributional considerations were even more strongly
emphasized. Thus there were sections in it dealing with disparities of
income, concentration of incomes, and so on. A key to the distri¬
butional thinking which underlay the Nehru-Mahalanobis strategy is
to be found on page sixteen of the document: ‘The essential problem
here is to reduce the spread between the higher and the lower incomes
and to raise the level of the minimum (italics mine). However, on going
through the text it becomes apparent that there was no clearly laid out
strategy which could be expected to raise the ‘minimum level’—at
least, not one that could match the industrialization targets articulated
with great eloquence in the first two plans.
How can this be explained? If we recall the state of development
theory which prevailed around the mid-fifties, it will become quite
apparent why distributional statements tended to be qualitative and
vaguely centred on issues of institutional change. This is because all the
models used operated under the postulate that ‘accumulation + con¬
sumption = production’—ignoring the fact that there are certain types
of consumption which are quite close in character to accumulation.
Mahalanobis, as we have noted, had of course explicitly drawn atten¬
tion to the role of education as an equalizing force, and had strongly
stressed that educational planning was an essential part of the planning
process. But he too had operated under the same type of assumption
relating to additivity. In fact, it may be maintained that he went one
step further by linking consumption with the stock of capital goods
which is tied to producing consumer goods. In other words, by ruling
out shiftability, he had imposed two constraints instead of one. Strictly
speaking, in his model, consumption could grow over a period of time
only if there were a prior increase in the capacity of capital goods
sector. This gave rise to the formulation of gradualist growth paths of
consumption, subsequently developed by a number of economists.15
These assumptions were obviously too rigid. They ignored the
possibility that with substantial labour surplus, the redistribution of
consumption with an unchanged total could lead to an increase of

capital stock (the Nurkse-Kahn point),16 and also to the labour-
productivity-wage nexus, which was later emphasized by Myrdal.17
Thus, the distribution of consumption among contemporaries was
seen as a subsidiary issue. Pride of place in plan formulation was given
to the question of present-future choice—the classic issue of ‘jam
today versus jam tomorrow’. The crucial variable in the whole exer¬
cise was the time needed to equip the economy with a large enough
capital stock, higher than would be possible by direct attempts at
redistribution.
The above formulation has been put in a somewhat schematic way,
but I believe that central issues are seen in a clearer light if the bare
bone of economic logic is first exposed.
Can this be described as what later came to be called a ‘trickle-down’
strategy? I think that the answer is ‘yes and no’. ‘Yes’ because it
promised an improvement in the consumption level only as the end
product of a process of accumulation. ‘No’ because it did not require
that any particular income group had to be specially treated. There was
no necessary presumption that a high income stratum was necessary
because it served an important role in the accumulation process. The
‘bearers’ of the accumulation process did not have to belong to a speci¬
fic, well-defined socio-economic class or stratum. Political expediency
was by no means absent from planners’ considerations. But it would be
somewhat gratuitous to add that the expedient was necessarily identified
with the optimal. It was believed that a sharp increase in the size of the
public sector financed by initial savings out of taxation would tend over
a period of time to socialize a greater proportion of the flow of current
incomes through increased production and productivity of the public
sector. Along with a steady growth in the productivity of agriculture
and in small and village industries, fuller employment at an adequate
wage level could be reached, sooner or later. Even Mahalanobis’s four-
sector model, with emphasis at one extreme on heavy industry, whose
ownership was to be very largely vested in state hands according to the
Industrial Policy Resolution of 1956, and priority at the other extreme
on cottage and decentralized sectors with a presumed potential for
large-scale labour absorption, was, after all, based on a variant of the
same logic.
Difficulties with the implementation of such a strategy were quite
considerable in the context of India’s mixed economy, a point per¬
ceived neither early enough nor adequately enough in the planning
process. The model failed as a redistributive device because the initial

distribution of income-yielding assets such as land was very unequal,
and the state had very few instruments of control to siphon off rising
private incomes into additional public savings. It is true that marginal
tax rates on non-agricultural incomes were very high, but they did not
produce the desired result. Suggested reforms, such as the ‘expen¬
diture tax’ as modified by N. Kaldor to suit the Indian condition, were
never given a serious chance.
The situation became worse because the main action correlate, that
a rapid build-up of publicly owned capital stock was going to help
channel an increasing proportion of surplus flow into public coffers,
turned out to be quite an unreliable instrument for this purpose. This
was partly because of the inefficiency in setting up and running these
enterprises, and partly because the government did not possess enough
clarity of objectives for the public sector. In fact, much of the early dis¬
cussion on public sector pricing policy was based on the idea that the
public sector ought not to make profits.
It was evident by the early sixties that something was seriously
wrong on this question.18 A committee was again set up under the
chairmanship of Mahalanobis to look into the question of whether
the ‘level of living’ had improved or deteriorated as a result of plan¬
ning. The report came out with the Scottish verdict of ‘not proven’,
and Pitambar Pant was instrumental in setting up a working group
which was supposed to look into the question of raising the minimum
level of living. Helped by Pant, this working group, which com¬
prised such eminent personalities as the economists D. R. Gadgil,
B. N. Ganguli, P. S. Lokanathan, and V. K. R. V. Rao, the poli¬
ticians M. R. Masani and Ashoka Meta, and others, came out with a
set of recommendations on the ‘minimum level of living’. The
committee made a recommendation to distinguish between public con¬
sumption such as housing and education which was to be financed by
the state directly, and private consumption which was to be met by an
individual’s income. Calculated at 1960/1 prices, the basic minimum
was to be no less than Rs.20/- per month on a per capita basis for rural
areas and Rs.25/- per month for urban areas.
Pitambar Pant went ahead with working out the possibilities of
achieving this target in quantitative terms in an internal document
which was prepared by the Perspective Planning Division of the Plan¬
ning Commission. This document was doubtless a remarkable one for
its time. As early as 1962, it worked out, in a rough and ready way, the
options available. Pant, whose enthusiasm was the chief motive force
behind this piece of work and who declared himself to be in favour of
poverty alleviation as the central concern of planning, came to the
conclusion that ‘some degree of inequality in incomes is thus an essen¬
tial part of the structure of incentives in any growing economy’. He
then enquired as to whether the needed degree of inequality could be
quantified or not. After giving a broad analysis of various factors likely
to shape income distribution in India during the next fifteen years, he
came to the conclusion that the distribution of income amongst the
upper 80% of the population in 1975 ‘may not be very different from
the present pattern’. He excluded the lowest 20% from his calculation
because they were not likely to be affected by the growth process, and
had to be taken care of by means of‘transfer payments, etc.’. He then
looked at the question of the minimum required rate of growth and
came to the conclusion that an average annual rate of growth of 7 % per
annum sustained over the decade 1965-75 was needed in order to give
the poorest three deciles a nutritionally adequate diet. In arriving at
this number, Pant allowed for a base year national income figure for
1965/6 of some Rs.90,000 millions (at 1960/1 prices), as well as for a
slight increase in inequality.
I have given an indication of the contents of Pant’s remarkable docu¬
ment as it is not sufficiently well known. Moreover, it is probably one
of the first attempts in a non-socialist developing country to work out a
perspective for poverty eradication. However, because of the disas¬
trous harvest failures in 1965 and 1966, Pant’s base level assumption
turned out to be way off mark, and details of this particular exercise
were almost completely forgotten even within the Planning Com¬
mission itself. The document was never officially published, but an
edited version was printed in the mid-seventies in a non-official publi¬
cation after an Approach document prepared for the Fifth Five-Year
Plan had for the first time put the problem of poverty eradication in the
foreground of political discussion.19
The cut-back in public investment and increase in the rupee cost of
investment consequent on the devaluation of 1966 led to a depression
in the aggregate rate of investment. But investment in agriculture was
kept up because of the incentives given to the relatively better off
farmers who initially spearheaded the Green Revolution. The grain
output recovered, and by 1970/1 production of cereals increased to
96.6 million tonnes, in comparison with 62.4 millions in 1965/6. There
was a particular increase in wheat; the high-yielding varieties made a
spectacular breakthrough in the north-west, especially the Punjab, and

production went up from 10.4 million tonnes to 23.8 million tonnes, a
very remarkable rate of growth indeed.
This increase gave rise to fear in certain quarters that India could
soon be faced with a demand bottle-neck for food, which would either
require large-scale exports or an expanded home market. Since Indian
grains were faced with stiff competition in the international market,
even the more conservative policy-makers came to feel that the time
had come to attempt a strategy for growth with an accent on redistri¬
bution. This was supposed to ensure the removal of a ‘demand bottle¬
neck’ and to generate employment opportunities. A new definition of
‘relevant radicalism’ was mooted by those who did not favour a state
build up of production assets in the industrial sector, but were realistic
enough to understand that industrial development by the private
sector, even at its maximum, could not absorb the additional labour
force generated by natural population growth and the displacement
created by agricultural transformation. They emphasized the special
role that an expanded public works programme could play in this
context.
More radical opinion was not opposed to a public works pro¬
gramme, but felt that it was not enough by itself to alleviate the
problem of‘mass poverty’ which now moved into the centre of political
attention. This led to the formulation of an Approach to the Fifth
Five-Year Plan which was based on a strategy of ‘redistribution with
growth’.
The Approach to the Fifth Five-Year Plan followed the recom¬
mendation of the working group in its definition of poverty in terms of
nutritional inadequacy, and further encouraged by the political mood,
ventured to put explicit redistribution in the lowest three deciles as an
objective in its own right. It will be apparent from the bare outlines of
Pant’s document that he did not, in the final analysis, envisage any¬
thing significant by way of direct redistribution. He was extremely
cautious in this regard, and possibly with very good reason. But he was
much bolder in assuming a sustained rate of growth of 7 % per annum
over a ten-year period. While he did not work out the full range of
balance of payments implications, it was quite clear that his approach
could succeed only with a large net inflow of concessional external
capital. This was possibly his own deduction from the generally pre¬
vailing climate of international opinion which talked in terms of ‘two-
gap models’, which even without any reference to poverty eradication
found a very special role for foreign aid. At the time the Fifth Five-Year
Plan Approach Document was being formulated, planners postulated
a much more modest growth rate, but they wanted to be self-reliant.
The idea of self-reliance was not new. The Third and Fourth Five-
Year Plans had discussed the ultimate objective of elimination of con¬
cessional external assistance. The Third Five-Year Plan had talked
about the ‘economy being independent’ of external assistance outside
of the normal inflow of foreign capital by 1975/6. The Fourth Five-
Year Plan postulated in the same vein the need to minimize depen¬
dence on aid from outside sources.
Thus, two sources of ideas found their joint expression in the formu¬
lation of the Approach to the Fifth Five-Year Plan, which postulated a
specific objective of poverty eradication along with the elimination of
net aid. The task was no doubt an ambitious one, but the political
mood was encouraging—at least initially, as the ruling party had been
returned to power in 1971 with a popular mandate to remove poverty.
The work of the planners was initially a technical one of demonstrating
whether the objetives were at all achievable, and if so by what time.
We need to understand the nature of the exercise more carefully
before we can place it in the context of India’s planning.
Growth with Redistribution
To determine the rate and pattern of growth for the Fifth Five-Year
Plan, it was no longer considered sufficient to postulate a desired rate of
growth of consumption per capita, and it was found useful to pose the
central decision problem for planning purposes somewhat differently.
The statement of the problem in the Approach to the Fifth Five-Year
Plan can be summarized briefly as follows: Given the length of the
planning horizon and the objective of eliminating net aid by the end of
the planning period, find the inter-sectorally consistent growth rates of
output that would be necessary to raise the average per capita con¬
sumption level of the lowest three deciles to a stipulated figure. In order
that the average of this group can be raised progressively over time,
especially after taking into account a population growth rate of 2 % per
annum, it was obviously essential to allow for positive investment
levels in the terminal year. Furthermore, since net aid had to be
reduced to zero by the terminal year, domestic savings had to equal
domestic investment in the terminal year. There was however a
cushion provided by the assumption that net inflow of external capital
for the plan as a whole would be a non-zero sum worked out from inde¬
pendent estimates.
To work out the size and composition of a plan budget which would
achieve the reduction in the inequality coefficient implicit in the stated
objective while also reducing net aid to zero in the terminal year, the
exercise proceeded in two steps. As a first approximation, a macro
model was constructed to determine the magnitude of total investment
that would be required to achieve a prespecified rate of growth. After
deducting the net inflow of external capital, total savings for the plan
period were computed. From this, a yearly savings profile was com¬
puted on the assumption of a linear increase in the investment level.
Inter-industry analysis was used to compute gross production levels
for the terminal year using the following steps:
1. A breakdown of total investment by delivering sectors was drawn

up on the basis of observed trend adjusted in the light of overall
data on major investment projects.
2. The domestic input coefficient matrix was separated out from the
total coefficient matrix inclusive of imported raw materials. A
similar netting out was made for the domestic and imported parts
of different components of final demand.
3. A detailed consumption submodel was developed which enabled
the commodity composition of total consumption to be calculated
on the basis of a detailed expenditure breakdown by twenty-seven
size classes, on the assumption that the average consumption level
of the three lowest deciles would rise by the stipulated amount.
Several alternative scenarios were worked out to test the sensitivity

of the results to changes in the length of the planning horizon and to
variations in the annual average rate of growth of gross domestic
product over the planning period. The results were not altogether
unexpected in a broad qualitative sense, but the magnitudes involved
were quite revealing.20
It was found that if a higher growth rate could be achieved, the
extent of the reduction required in the average consumption level of the
three top deciles would be smaller. In other words, a higher rate of
growth would help in achieving the minimum level of living for the
poor without creating large social pressures. In fact, it was found that a
rate of growth of 6.5% in gross domestic product (GDP) eliminated
the decline in the average level of consumption of the first three
deciles altogether, whereas with a growth rate of 5.5% as adopted in
the ‘preferred variant’ of the model, the three top deciles could not
maintain their consumption levels. But a higher growth rate could be
achieved only if the implied capital-output ratio could be lowered, or if
there were a greater inflow of external capital, assuming that the
marginal propensity to save out of domestic income was more or less
given. Lengthening the time horizon had the predictable effect of
reducing the rigours of the redistribution process.
Interesting results were obtained on the production side. It was seen
that provided agriculture could grow at around 4% per annum in
terms of value added, it was possible to meet the consumption target for
the poorest deciles. While this was substantially higher than the
average growth rate that had so far been attained in the agricultural
sector over the planning period as a whole, it was not an altogether
impossible target. There were clear indications that the ‘luxury goods’
sector, defined as items which figured more or less exclusively in the
consumption baskets of the first two deciles, must grow at a slower rate.
But it was noticed that the rate of growth in the so-called heavy and
intermediate sectors was fairly high, and practically invariant to
changes in the redistribution coefficient.
There were two main reasons for this result. First, the model had a
considerable amount of import substitution built into it, because of the
assumption relating to net aid; and second, new agricultural inputs
were purchased from industrial sectors, which in turn required
increases in the production levels of such sectors as energy, oil, and
fertilizers. Given that imports were limited by the exogenously stipu¬
lated growth rate of exports and a diminishing inflow of net aid, these
intermediate and capital goods sectors showed a rate of increase of
around 7-8% per annum.
It was clear from these exercises that in so far as there were major
supply constraints on meeting minimum needs, India’s economic
strategy needed to pay greater attention to agriculture and energy.
‘Food’ and ‘fuel’ emerged as the leading sectors, as there was at that
time significant excess capacity in sectors such as steel. The Mahalano-
bis strategy was seen to be not so much basically flawed on the pro¬
duction side as inadequate because of the relatively simple treatment of
the agriculture sector and inability to take account of the different end
uses of intermediate products. This last deficiency no doubt arose from
its highly aggregated character.
The weak point of the model adopted in the Approach was its
formal neglect of the relationship between production and income
distribution. The model did not solve for incremental income flow by
size classes. While the link between demand and production was
allowed for in terms of varying propensities to consume different com¬
modities, the reverse link from production to demand was not included
in the formal description of the model.21
Inability to include a formal description of the income-generation
process did not preclude the planners from making suggestions on
policy changes as to how to increase the capacity of the poor to buy.
Data difficulties were formidable enough to prevent any quantitative
treatment of income distribution by sectors. Indian national accounts
even today include a large self-employed sector which is extremely
heterogeneous in terms of social and occupational characteristics.
The main message of the model was quite clear, however, despite all
its limitations. It showed that if the growth rate of around 5-6% per
annum was about the maximum one could have, it was impossible to
bring about a significant reduction in poverty, howsoever defined,
without attacking the problem directly. A higher growth rate was likely
to be self-defeating unless it was rendered possible by large-scale
transfer of external resources. Further, the market-determined com¬
modity vector was far from what was necessary if basic needs were to be
met. Despite aggregation biases and rigidities inherent in the assump¬
tions relating to foreign trade, the pattern of growth of different
commodity-producing sectors was shown to be a function of two sets
of choices: (a) the present-future choice much discussed earlier, and
(ib) the tolerance for inequality in consumption. Contemporaries
counted as much as unborn generations. While the ‘oil crisis’ and the
inflationary pressures generated as a result of serious harvest failures in
1972/3, mitigated only partially by a recovery in 1973/4, made it
imperative to redraft the Approach to the Fifth Five-Year Plan and to
considerably dilute its ambitious redistribution objectives, the idea
that planning of appropriate investment levels by commodity-
producing sectors was necessary but by no means sufficient persisted in
the context of public discussions relating to poverty eradication
programmes. These additional conditions implied the use of additional
instruments of policy, which in a fully planned economy could be
reduced to achieving appropriate relationships between prices and
wages (in the vectorial sense) but in a mixed economy with extensive
underemployment required more direct intervention in the economic
growth process.
As a result, when the Sixth Five-Year Plan was formulated in 1980, a
number of poverty eradication measures were introduced. The impact

of these measures, which basically consisted of rural employment pro¬
grammes of different types along with programmes for self-employ¬
ment aimed at improving the productivity of small and marginal
farmers and rural artisans, has been much discussed in India, and
there has been considerable criticism from different parts of the poli¬
tical spectrum. Even leaving out considerations of ideology, there is
considerable difference of opinion on what these programmes have
achieved. The discussion is complicated by the fact that experiences in
different parts of the country differ a great deal. Such eminent eco¬
nomists as M. L. Dantwala and Nilakantha Rath have widely diver¬
gent views on the usefulness of these integrated programmes for rural
development.
While the empirical evidence is somewhat mixed, we need to discuss
what kind of redistributive policy frame can be devised within the para¬
meters of the mixed economy which prevails in India. In this respect,
one’s perception of the possibilities of the system, in terms of the ability
to take redistribution decisions in the face of deeply entrenched interest
groups, is as important as the understanding of structural constraints.
Further, a distinction must also be drawn between impact effects and
long-term responses.
Briefly, I believe that within the kind of political system that India
runs, from the point of sustainability the most significant redistributive
measures will centre around improving the productivity of small and
medium farmers, especially those engaged in the production of food
grains, along with an employment guarantee scheme in the rural areas.
A one-sided emphasis on one item or the other may not prove suffi¬
cient, either because of inadequacy of food production or because of
inadequacy of purchasing power. This can be significantly supple¬
mented by a programme of education, health, and nutrition, each of
which has a major effect on improving productivity besides conferring
substantial consumption benefits. In the Indian case a programme of
population limitation can also serve as a redistributive measure, but it
is unlikely to get off the ground in a decisive way, especially in the rural
areas, unless the above programmes are implemented with a vigour
they have lacked so far.
It will be obvious that I have not yet talked about asset redistri¬
bution, especially the redistribution of land which traditional radical
thinking would hold to be the key element in a redistributive pro¬
gramme. While I do not believe that any large-scale redistribution is on
the cards, it is certainly possible to do a great deal more in relation to

security of tenancy, conditions relating to crop-sharing contracts
(especially on how inputs costs are to be shared, etc.), and improving
the working conditions of agricultural labour.
This discussion of the approaches adopted by the Fifth and Sixth
Five-Year Plans show that there was a shift in emphasis away from the
earlier concept of a ‘traverse’, with its so-called heavy-industry bias, to
a strategy centring around ‘food’ and ‘fuels’. Or to put it differently,
there was a much better appreciation of the fact that the problem of
‘traverse’ could not be studied exclusively in terms of the ability to
sustain domestically a machinery sector of sufficient scale. It became
quite clear that with a growing population and limited natural
resources, emphasis had to be placed on improving the productivity of
land through the greater diffusion of technological improvements
which would not add to the existing pressures of unemployment and
inadequate employment. Meanwhile, the balance sheet of the Indian
economy towards the end of the seventies presented a mixed picture.
4
Problems of Plan Implementation
Weak Links in the Indian Planning Process
It has been widely held among observers of the Indian planning expe¬
rience that Indian plans may be good on paper but are rarely good in
implementation. This is a point of view which deserves serious consi¬
deration. What can this proposition mean? A simplistic interpretation
is that while Indian plans project a desired state of affairs with some
precision, and may also succeed in indicating directional changes that
may be required in consonance with the objectives, they do not pay
enough attention to issues of feasibility. If this is indeed the case,
Indian plans cannot be good even on paper. Without question, a good
plan must minimally attempt a proper appraisal of the feasibility of
what it normatively postulates. A second interpretation is that plans
may be both feasible and consistent on a very high level of aggregation
but are unlikely to work in practice—not merely because feasibility and
consistency tests are carried out at a high level of aggregation, which
can prove very misleading, but because there is a very large number of
actors involved whose decisions cannot be influenced in the desired
directions by what the planners propose. A simple illustration may be
useful. In the past, plans have often projected that if certain inter¬
sectoral balances are maintained, the plan should be able to generate a
certain rate of growth of employment, or a certain envisaged reduction
in the current account deficit on the balance of payments, which did
not in fact materialize. One possible explanation for this failure is that
plan models have been improperly specified, in the sense that they have
failed to capture the true state of underlying structural relationships.
Thus, it is possible that employment elasticity of output was put at a
very high level, or that projections on the side of exports were too opti¬
mistic. But there can be other explanations as well. It is possible that
plans did not work because the desired co-ordination of activities
40 Problems in Plan Implementation
among the different actors was faulty, either because ‘messages’ were
faulty, or because they were transmitted with delay, or went contrary
to the specific interests of the actors involved and were therefore
evaded.
The above reasoning can be explained with the help of a concrete
example. We take the case of the power sector. It is often held that the
state of infrastructure is a major reason for the slow-down of growth in
industrial production. Professor Isher Ahluwalia attaches a lot of
importance to infrastructural bottle-necks as a cause of industrial slow¬
down in the period stretching from the middle of the sixties onwards.1
That there is an element of truth in this argument is evident from the
available data. It can be seen from Table 12 that the capacity for power
generation grew more slowly in the 1970s than in the 1960s, while from
Table 13 we see that the power-intensive manufacturing sectors, such
as basic metals and alloys, electrical and non-electrical machinery, as
well as the transport sector, also recorded smaller growth in the 1970s
than the 1960s.
Now, the question arises as to why the planning of the power sector
in Indian plans turned out to be faulty, as is widely alleged. One reason
can be that the total investment allocated to power was deficient. In
that case, obviously, the plan was ‘bad’ even on paper. However, it
may also be that demand was wrongly estimated because planning was
based on incorrect information. For example, planners may have
taken into account only the demand originating in the organized sector
of Indian industry, and left out the ‘unorganized sector’, which inci¬
dentally is growing very fast.2 This implies an ‘information’ failure
with raw data. This has undoubtedly been part of the explanation of
the chronic ‘power crisis’. But this need not be the only form of
information failure. There have also been several occasions when the
reason for the power shortage has lain completely outside the power
sector. Typical examples would be delay in the movement of coal, or in
the unsuitability of coal supplied to a specific power station. Failures to
co-ordinate the coal, power, and transport sectors can undoubtedly
explain part of the power shortages. Finally, it is also quite possible that
price signals have not only been weak but have acted ‘perversely’,
namely by introducing destabilizing expectations regarding avail¬
ability, or through insufficient flexibility in the prices charged. In India
all the above three reasons have applied, although they operated
during different periods with varying degrees of intensity. Moreover,
in the case of power, another major contributory factor has been the
Problems in Plan Implementation 41
inter-regional diversity in the rate and pattern of growth of demand, and

the uneven rate of growth of productive capacity. The inter-regional
dimension of plan implementation is a separate question altogether,
and is treated separately. Meanwhile, we should consider whether
there may not be other factors at work which affect plan implementa¬
tion as well.
While the analysis of the power sector can be further extended to
include the choice of project site, or the size and type of generating sets,
and so on, enough has been said to suggest a possible classificatory
scheme into which implementational failures can be fitted, at least as a
first approximation. An implementational failure may be said to arise
if one or more of the following conditions hold:
1. Planning authorities are plainly inefficient in gathering the rele¬

vant information within the needed range of precision.
2. Planning authorities respond with considerable time lags when the
underlying situation changes.
3. Agencies through which the planning authorities are supposed to
implement plans have little or no capacity (or in some cases, moti¬
vation) to carry them out. There are two important sub-cases (a)
publicly owned agencies, which operate largely according to ‘non¬
price’ signals (such as government ‘orders’); and (b) private
agencies, whose behaviour can be approximated with the help of
profit-maximization models; in the latter case, the plan may have
projected a product mix on ground of social desirability which may
not be optimal for the agency concerned, and there is then a
tendency to ‘avoidance’ which can lead to distortions.
A useful elaboration of condition 3 is to distinguish between the

‘strategic’ and the ‘parametric’ behaviour of the agencies concerned.
When agencies can be expected to behave in a strategic fashion, it is
necessary to be much more cautious in indicating a plan target, espe¬
cially in sectors involving significant inter-industrial linkages.
As I see it, the main change in regard to plan implementation that
has come about in the Indian economy over the years is that the scope
for strategic action by private actors has widened, partly because the
size of relevant industrial or production units has increased, and partly
because the distinction between political behaviour and administrative
direction has been considerably eroded.3 On top of this, changes taking
place in the world economy have also helped to make the problem of
production planning a more difficult task, especially because the
degree of ‘openness’ of the economy has increased in recent years.

Does this mean that the proper role of ‘planning’ relative to that of
the market has significantly altered, an issue of current debate in
India? This takes me back to a point I raised in the first chapter, where
I expressed the view that ‘planning’ should be viewed more as a form of
instrumental inference, as Adolph Lowe has emphasized in his wri¬
tings. Instrumental inference, according to Lowe,4 consists, first, of
derivation of one or more paths which can transform the initial states into desired
terminal states. While the derivation of the transition path is a necessary
first step, based in large part on structural requirements, it has to be
supplemented by establishing behavioural patterns which will set the system on
goal-adequate trajectories. It can be maintained that Indian planning has
largely confined its attention to the first task, and has not paid very
serious attention to the second.
In my opinion, when one talks about ‘greater reliance on the market
mechanism’ it would be more appropriate to talk about goal-adequate
behaviour sustaining what can be called transitional paths, consistent
with terminal goals reflected in the plan documents.
This does not imply by any means the abandonment of planning,
but redirection of its scope. Like Lowe, I also believe that a return to
laissez-faire will be self-destructive, especially in a country like India
where one of the major pressures on the continued viability of the
system is emerging from the rapid growth of population, a process
which is only remotely related to market processes.
What are the components of goal-adequate behaviour? One impor¬
tant idea, going back to Adam Smith, is a relative emphasis on directly
productive activities as against rent-maximizing activities. Krueger and
Bhagwati have written extensively on this class of issues. Their argu¬
ment has rested basically on demonstrating that non-functional restric¬
tions imposed by a regulatory state may end up systematically
distorting incentive patterns, to the detriment of the accumulation
process. Pranab Bardhan has used a basically similar approach in
explaining the relatively slow growth performance of the Indian eco¬
nomy as contrasted with that of South Korea.5 Bardhan’s emphasis is
on the role played by ‘subsidies’ which will be discussed later in the
context of plan financing. But basically the point remains the same: in
either case, the distribution of income is altered in a manner that is
considered to be prejudicial to the growth of socially desired baskets of
goods and services. While not denying that some forms of government
intervention tend to produce the effects noticed by these authors, the
basic question remains: can a market system, especially an open

trading system, provide the needed set of signals? It will be recalled
that Frederick List’s main criticism of the free market system advo¬
cated by the classical economists was that it attached too much
importance to ‘production’ and too little to ‘productive power’.6 List
accordingly recommended protection to insulate the domestic manu¬
facturing sector and provide time for learning. Government inter¬
vention to promote ‘learning by doing’ was judged to be a good thing,
even by John Stuart Mill, otherwise a very good classical economist. It
is of course true that in the case of several developing countries, not
excluding India, the desired amount of learning may not have
materialized. But in the case of India, at least, it remains a very moot
question as to whether the learning effect has been negligible or not. In
my opinion, learning effects have been an important feature of Indian
industrial and agricultural development, although not without a cost.
We have also seen that the ratio of savings to gross domestic product
has increased, but the productivity of investment may have fallen. We
shall discuss in the next chapter whether any clear inference can be
drawn from an increasing capital-output ratio—especially since the
pattern of investment has shifted from traditional uses, partly due to
changing technology and partly to offset diminishing returns to land.
The government policies have helped to promote technological change
in agriculture even though this has meant paying subsidies to certain
classes of farmers in rapidly growing states like the Punjab. While this
has doubtless several income distributional consequences which
cannot be left unquestioned, it is very much an open question whether
the observed growth rate would have materialized in the absence of this
support. In short, the point is that when major structural adjustments
are called for, goal-adequate behaviour may very well include scope for
price as well as non-price adjustments. Whether the latter would
include typical ‘quantity’ restrictions or direct public ownership is an
issue which can be decided only in the light of the specific charac¬
teristics of a given situation. A crucial component of any decision¬
making process would appear to lie in the ability to obtain or generate
the necessary information. Inability to carry out the technological
transfer so widely regarded as necessary for initiating growth-
promoting changes would appear to lie also at least partly in the sphere
of information failure—that is, the inability to assess the social value of
a particular piece of information. It is extremely doubtful whether the
problem can be resolved only in price-theoretic terms. Considerable
direct investment in appropriate forms of human capital appear to be

necessary too, as the Japanese and Korean experiences would suggest.
Indian planning may be rightly criticized for not making sufficient
use of the price-theoretic dimensions in the implementation process.
But it is not permissible to draw from this observation any far-reaching
conclusion regarding the replacement of ‘planning’ by ‘the market’.
There is insufficient appreciation of the developmental dimension of
the administrative process, some of which has been indicated already.
It is not possible to maintain that administrative processes are per se
inadequate to deal with issues relating to innovativeness, and so on,
because the exercise of control in large-scale corporations has not
necessarily inhibited their creativity. A somewhat different discussion
of the implementation process relates to the issue of what can be appro¬
priately done at the different levels of government. This issue is
important enough to be dealt with separately, as in the case of India the
large size of the country would appear to suggest the need for a flexible
organization framework for planning.
To return to the question with which I began this analysis, the
statement that Indian plans are good on paper but bad in implemen¬
tation can only mean that planners have used as a conceptual frame a
set of devices which are informationally inadequate for arriving at
appropriate targets, along with a set of operating rules which are rela¬
tively insensitive to conjunctural variations and also insufficiently
permissive of autonomous decision-making by agents even in areas
where they can be expected to be knowledgeable.
The Krueger argument on rent-seeking is quantitatively difficult to
estimate. Even otherwise, its validity is difficult to assess as it is not
clear to me that ‘without restriction, entrepreneurs would seek to
achieve windfall gains by adapting new technology, anticipating mar¬
ket shifts correctly, and so on’.7 In fact, I believe that Krueger’s
argument seems to imply that all distortions are exogenous or policy-
induced, and are not themselves functions of structural properties of
the economy being studied. Furthermore, it would seem to suggest that
resources can be shifted around costlessly, or that the government can
resort to any amount of non-distortionary taxation. In the Indian case,
these are patently extravagant assumptions. This implies that while
no good plan can afford to ignore major issues of implementation
through incentive-adequate devices, it cannot in a structurally back¬
ward economy rely solely on the market as the instrument of plan
implementation.8
Spatial Implications of the Development Strategy
In my discussion on problems of plan implementation, I have thus far

omitted any reference to a whole complex of issues which emerge from
the fact that India is a large country with considerable agroclimatic
variations. These spatial dimensions of the development problem have
so far been referred to only implicitly, in discussing the implications of
regionally uneven rates of growth of agricultural productivity.
It is now necessary to take explicit account of several major con¬
ceptual problems that the space dimension introduces into any plan¬
ning discussion. First, the question of transportation costs and the issue
of restructuring production plans so as to minimize the resources
involved in transportation cannot be disregarded. Secondly, the pre¬
sence of strong external effects in space implies, as has often been noted
in the growth literature, the emergence of polarizing influences.9
Thirdly, the fact that capital in the sense of money capital is more
mobile than labour, especially unskilled labour, can lead to significant
differences in the levels of living in different parts of the country.10
Fourthly, the standard assumption that production functions invol¬
ving commodities and services are uniform can no longer be assumed
to be valid within large countries. This is noticed within India when it
comes to the production of even major staples such as rice, sugar cane,
and the like. Finally, social and cultural practices tend to vary so con¬
siderably in the different parts of the country that it is not possible to
assume that the same economic stimulus will produce a largely similar
response throughout.
Thus, the large size of a country like India tends to increase both the
possibilities and the problems of planning. On the one hand, it presents
the possibility of deriving the advantages of scale that a large market
entails; but on the other hand the very fact that regions are unevenly
endowed with relevant economic resources at the beginning of the
planning process tends to bias the formulation and implementation of
plans in directions which are more conducive to differential growth
than to regional equity. That this has happened to a certain extent
cannot be denied either by causal empiricism or by careful analysis of
the data.
Is it not possible to maintain that the problem is better taken care of
by leaving decision-making to the market? Once a political structure is
assumed as given, it may be argued that the market can be expected
to cope more successfully with the problem of size as it will be less
expensive in terms of incentives, a more rewarding game than any that

a central planning authority can play vis-a-vis the subordinate planning
authorities.
This is a complex question and can only be answered with reference
to the type of planning that is being practised. The presence of external
effects and problems of scale would seem to suggest that decentralized
planning through the market cannot be expected to yield optimal
results. A market system will spatially give rise to growth poles whose
ability to transmit impulses evenly can be seriously questioned. Fur¬
thermore, the benefits of scale will give rise to the emergence of
productive units with the power to manipulate prices of inputs and
outputs to their advantage. Very likely, these powerful market units
will gravitate towards growth poles, tending to reinforce the agglo-
merative forces with further adverse effects on equity. The Brazilian
experience during the sixties and seventies possibly corresponds to
some features of the model sketched here.
In the case of India, it is certainly true that deficiencies of the market
mechanism in promoting what plan documents called ‘balanced
regional growth’ were implicitly or explicitly recognized from the mid¬
fifties onwards. Perhaps the pattern of economic development expe¬
rienced during the colonial period, with infrastructure concentrated in
certain developed coastal towns while backward hinterlands supplied
raw material and labour and the gains of international exchange were
unevenly distributed, had left an adverse impression on the percep¬
tions of the Indian political elite. However, it is not clear whether the
type of planning that India adopted has in fact succeeded in avoiding
the dangers of polarized growth. Quite a few would maintain that it has
not.
I have already had occasion to refer to the nature and varied impact
of the Green Revolution in India. Similarly, the industrial develop¬
ment of the country has also been highly uneven in space. From the
statistics on the distribution of value added by states (Table 33) it
would appear that the average per capita domestic product in the
richest state is nearly three times as high as in the poorest one. While
these statistics can be questioned on the ground of coverage as well as
for their interpretative significance, it would be difficult to deny that
the problem of poverty is beginning to emerge as more of an inter¬
regional problem tha * before. In other words, while India still remains a
poor country on the average, certain parts of the country are much
poorer than others. It is no longer homogeneous, regionally undiffer-
entiated poverty that we are dealing with, but areas of rising economic
well-being accompanied by stagnating economic zones. It may be
maintained by historians that this has always been so, but some would
say that this has become apparent even as a result of regionally skewed
growth impulses.
How have plans and planners actually viewed the process? Can
things be done better in the future than in the past? First of all, we
should recognize that this is not an issue of plan implementation in the
narrow sense of the term. We are also dealing in part with the broader
political processes which are reflected in the functioning of the federal
polity that is India. I shall have occasion to comment on this aspect of
the matter as well, although my comments in this case will be neces¬
sarily brief, given the general scope of this volume.
The planning process in India has generally recognized several
levels of decision-making. First, we have plans formulated at the central
level—that is, plans and programmes executed by different ministries,
departments attached to ministries, and statutory corporations over
which ministries serve as presiding authorities. Secondly, we have the
plans of the state governments and union territories, like Delhi, Pondi¬
cherry, and so on. Thirdly it is the job of the Planning Commission in
Delhi to produce a plan on a yearly and Five-yearly basis for the country
as a whole, which has to be sanctioned by an august body known as the
National Development Council, which consists of the prime minister
in his capacity as chairman of the Planning Commission, along with
chief ministers of the states and union territories.
The relationship between the centre and the states is a critical
dimension in the planning process. While many of the states have by
now got state planning boards as well as the Zilla Parishads and
Panchayati Raj institutions which reach further down into development
blocks and districts,11 the nature of the intra-state planning exercises is
seldom made public or presented as an articulated network of decision¬
making. In contrast, the nature of the centre-state planning exercise is
often made public, especially in matters relating to the size of the plan
for each state and/or the location of major centrally funded projects.
The basic idea behind the vertical division of responsibilities is that
states are likely to do best in activities whose ‘spread effects’ are gene¬
rally felt most conspicuously within the state itself (or even within a
part of the state), and where information availability is likely to pose
less of a problem. Thus, areas such as agriculture, small industries,
health, and education tend to figure very prominently in state plans.
On the other hand, large industrial projects, long-distance transporta¬

tion, communications, major investments in mineral development (as
in the case of coal, oil, etc.) generally come under the central plan.
Power is a sector where large outlays are incurred by both states and
the central government.
On the part of the state governments, there have been two major
criticisms of the functioning of the planning system. First, the states
generally complain that they are badly underfunded in relation to their
‘felt needs’, an expression which is often used in this connection.
Secondly, central government has over the years developed a whole
array of centrally sponsored schemes which are provided for within the
central budget and carried out by central ministries. State ministries
may sometimes be brought in to help in execution, but it is often
alleged that the latter’s role is entirely subordinate to the authority of
the central government, and that this leads to distortions as well as
inefficiencies in plan execution.
Criticism made by the states that the centre has arrogated to itself
more money and responsibility than it can legitimately claim has some
validity, especially given that the overwhelming part of the Indian
population live in villages. But observers who have worked at the
‘grass-roots’ level have also often noted that the state governments, in
their turn, have a lot to explain when it comes to the distribution of
their spending across different regions within the states: they tend to
favour areas around the capital city and areas which have emerged as
growth poles, and in some cases the reason an area is favoured is purely
electoral.
Some economists have argued in favour of inserting a new tier
between the states and the basic administration units, namely, dis¬
tricts; whereas others favour more adequate planning on the state level
accompanied by a strengthened form of district planning.
The chronic fiscal problem that some states experience has its origin
in a combination of factors, not all of which were anticipated at the time
the planning effort was initiated. First, some of the industrially deve¬
loped areas such as West Bengal have lagged behind states such as
Maharashtra, Tamil Nadu, and Karnataka because of an inability to
transform their capital stock into modern fields of industry such as
chemicals, petrochemicals, and so on. In the particular case of West
Bengal, the slowing of demand for railway transport equipment has
hurt its traditional engineering industries. This has led to a steady
erosion of financial resources which has compounded the forces
leading to its industrial decline. Thus, a state like West Bengal displays
several of the features which old industrial districts show in the UK and
has financial problems of a special character. The situation prevailing
in the North-Eastern States is different but equally anticipated: the
taxable capacity of the population is very narrow but the development
requirements, especially in the area of infrastructure, are particularly
large.
However, leaving out accidents of history and geography, the
chronic resource difficulty of the states has a major source in their
unwillingness to tap the agricultural sector to raise resources. I am using
the expression ‘tap’ rather than ‘tax’, because states have been
unwilling even to charge irrigation rates to cover maintenance costs, or
to impose appropriate electricity tariffs when the consumption of
energy is growing at a fast rate. State electricity boards, far from
earning the recommended rate of return on investment, often have
large deficits on revenue accounts. This cannot be ascribed entirely to
the inability to raise resources from the agricultural sector, to be sure.
Nonetheless, the fact remains that agriculture today is a sector
enjoying large subsidies that can only up to a point be justified by the
overall need for attaining a reasonable rate of growth of agricultural
production. Distributionally, benefits tend to accrue largely to the
richer farmers. Those who argue for a restricted role for the central
government in matters of investment allocation are rarely willing to
accept the need to tax the agricultural sector.
There is little reason to question the necessity for states to spend
more on matters relating to health, education, and many other public
goods. But it is not possible to maintain that this problem will auto¬
matically solve itself if the power to levy taxes, especially excise duties
on commodities, were left in the hands of state governments. It may
indeed help the prosperous states, especially those where industrial
development has progressed far and Green Revolution-style agri¬
culture prevails, but it is likely, if anything, to worsen the situation of
industrially backward states, other things remaining the same.
Some have come to the view that financial institutions, including
commercial banks, have a major role to play in facilitating an equitable
transfer of resources. The argument is valid only up to a point. There is
little doubt that the portfolios of these institutions are biased in favour
of the better-off states, but this merely reflects the logic of the growth
process in an uneven spatial environment, and in part the nature of the
business of these institutions. Goals such as equity are possibly better
met through the open budgetary exercises than hidden in subsidized

banking and other facilities. Obvious bias in favour of the well-placed
regions ought to be highlighted, but a very rigid application of any
mechanical rule in respect of loanable funds may in the medium-run
raise more problems than it will solve.
In sum, one cannot maintain the proposition that a larger devolu¬
tion of funds from the centre to the states will in itself provide the neces¬
sary stimulus for speedier development of the lagging regions, even
though more adequate funding may very well be needed. What is,
however, perfectly maintainable (and in fact essential) is to augment
the planning and execution capability of decision-makers at lower
levels of the hierarchy in the light of appropriate perspective plans for
the development of different agroclimatic regions. Location of indus¬
trial projects has very often been guided by considerations of short¬
term political expediency, whereas the development of agriculture has
often been neglected by inadequate investment in research and exten¬
sion activities, to mention one major item where direction has come
principally from central institutions. Conspicuous examples of such
neglect have become evident in regard to the lagging productivity
levels of crops grown in rain-fed regions, or in the lack of conjunctive
use of surface water and groundwater in the eastern region.
Resource Constraints on Regional Development
In discussing the problems of plan implementation, I have tried to

indicate that quite a few of these are not problems of implementation in
the narrow sense of the term. They have their origin in the basic design
of a mixed economy that India adopted within a constitutional frame¬
work that was federal in conception.
With the passage of years, the political system gravitated towards a
more unitary form of federalism, partly as a result of the process of
planning itself, but also as a direct consequence of the changing percep¬
tion of the external environment on the part of the political elite. As in
nature, every plan-induced action tends to produce a reaction, but
unlike in nature, the reaction is not equal in magnitude. We are now
witnessing pressure for greater regional autonomy even when from the
strictly market point of view India is far more integrated than before.
Obviously, this paradox has its origin in the feeling that economic
forces are helping the regional ‘haves’ as against the ‘have nots’. Is it
likely that this process has been going on because the political elite in
India has been colluding with the economic elite, such that the forces of
state intervention are strengthening the polarizing influence of market
forces? Or is it that the design and implementation of Indian planning
has been much too weak to neutralize the forces promoting uneven
development amongst the regions? To my mind, it would appear that
the latter explanation is much more credible, taking the planning
process as a whole. This is not to deny that regionally powerful lobbies
tend to bias investment decisions from time to time in a manner that
would seem to support the collusion argument.
If my perception is correct, it would follow that we need to streng¬
then the planning process in a strategic sense, because as I have already
argued there is nothing in economic theory that would suggest leaving
things to market forces alone. A spatial ‘trickle down’ strategy is
unlikely to work fast enough in a large and heterogeneous country like
India. It has been suggested that we need to view the planning problem
as a multi-level exercise. While there is no doubt that the broad change
in the point of view entailed in a ‘multi-level approach’ is a helpful one,
to date we have very few analytical results to go by when it comes to
multi-level planning. Its one-time advocate, the Hungarian economist
Janos Kornai, seems to have abandoned multi-level planning in favour
of what can be best described as a variant of‘market socialism’. In the
Indian case, the problem can be best taken care of in practice by
strengthening the synergy of the institutional motive forces repre¬
sented by the ‘state’ and the ‘market’; and by devising practical instru¬
ments and policies which can maintain a proper balance between
‘advancing’ and ‘lagging’ regions. The first set of issues were dealt
with in the first section of this chapter, but it may be useful to indicate a
few concluding remarks on the second set of issues.
We need to begin with the basic perception that there is a basic ‘fiscal
crisis’ in Indian public economy. It is deep and pervasive but it is not
ineradicable, even within the framework of India’s mixed economy.
To comprehend it one needs to enter the terrain of fiscal sociology, a
point to which we shall revert later. What is important to emphasize in
the present context is that without a major attempt at resource mobili¬
zation on the national scale, an adequate solution to the centre-state
resource problem will evade planners and policy-makers. A certain
rationalization of the pattern of expenditure and sources of revenue
can obviously be carried out, but no fundamental alteration is possible
without further raising public savings as a proportion of gross domestic
product.
Strengthening the productive base of backward states requires a

major attempt at raising their agricultural productivity per hectare. It
also requires generation of adequate off-farm employment in small-
scale enterprises in rural areas and smaller district towns. In addition,
there is the obvious need to develop a whole range of activities which
will create human capital as well as have a significant effect on res¬
training population growth.
All this requires that the states have to be not merely properly admi¬
nistered but also adequately funded. For quite some time to come,
resources will have to be transferred from prosperous states to back¬
ward states, and leakages in the transfer process will have to be
plugged.
The major contributions that central government can make in this
regard are to-raise the efficiency of large public corporations, reduce
the rate of expansion of its own bureaucracy, and reduce delays in the
completion of large centre-initiated projects. It can also contribute by
maintaining a non-inflationary macro-economic environment.
Regionally equitable development strategies are not necessarily
more expensive in terms of capital requirements, as sometimes held, if
they make better use of locally available resources, and also pay
greater attention to the prevention of premature urbanization or exces¬
sive growth of ‘primate cities’.
In fact, it can be maintained with adequate justification that India
has a great deal to gain from following an appropriate pattern of
regional specialization coupled with more adequate provision of public
goods on a regional basis. These gains will be reflected directly in the
form of higher productivity of relatively immobile resources, as well as
through long-term effects on the quality of human life.
A more systematic integration of regional planning and sectoral
planning will strengthen the process of attainment of long-held goals of
‘growth with equity’.
5
Some Current Issues of
Economic Policy
The Capital-Output Ratio in the Indian Economy
There has been a great deal of discussion in India in recent years about
the efficiency of resource use in the Indian economy. Thus, many
policy-makers as well as planners are of the opinion that the incre¬
mental capital-output ratio (ICOR) in the Indian economy rose
sharply from the mid-fifties to the early eighties. Dr V. K. R. V. Rao,
in his recent book on India’s national income, deduced from this
alleged fact a very major conclusion which is best stated in his own
words: ‘It is clear from our analysis that the policy we have followed for
capital formation during this period, from the point of view of maxi¬
mizing productivity and the impact on growth, has been erroneous.’1
Dr Rao’s conclusions may indeed be right, but it is not possible to
deduce any such conclusion without a more careful examination of
both the aggregate data and its internal composition. First, is it true
that the incremental capital-output ratio has risen very substantially?
Secondly, if the answer is yes, does the cause lie in factors specific to
India, or are they general concomitants of the growth process in a low-
income economy? Dr Rao proceeds from the time series of gross
domestic savings as a percentage of gross domestic product at market
prices as given by the Central Statistical Organization. As may be seen
from Table 2, the rate of gross saving increased substantially, from
9.5 % in 1951/2 to 22.3 in 1983/4, after reaching a peak of 23.4% in
1979/80. It may also be observed (from Table 1) that the marginal rate
of saving reached a high of 26.3% during the 1970s. This is indeed a
steep increase, and has often been quoted as an indication of the
growing maturity of the economy. On the other hand, the rate of
growth of GDP has not displayed a corresponding acceleration, as can
be seen from Table 5. An inference has therefore been drawn which
runs in terms of declining investment productivity. However, several
54 Current Issues of Economic Policy
questions arise. First of all, the high rate of saving in the period
1977_80 seems to have been in part due to exceptional factors as it has
since declined, reaching 22.1% in 1984/5. Thus, if the incremental
capital-output ratio rose during the late sixties and early seventies, it
appears to have come down somewhat in the course of the last two five-
year plans (as can be seen from Table 3), since the annual average rate
of growth of GDP has been around 5 % over the period 1975-85. The
transient factors on the savings side have not been fully analysed but
would include, among other things, sharply increased remittances of
Indian nationals employed in the Gulf countries. Secondly, even the
higher figure of 23 % may involve a measure of overstatement in terms
of capacity to add to the stock of domestic capital. Thus, the Report of
the Working Group on Savings appointed by the Department of
Statistics of the Ministry of Planning under the chairmanship of Dr
K. N. Raj came to the following important conclusion:
It will have been obvious from our analysis in Chapter 5 that, even though the
rate of gross capital formation in the economy would at first appear to have
risen by about two and a half times over the last quarter of a century (from
about 10 per cent of the GDP in the middle 1950s to nearly 24 per cent by the
end of the 1970s), the order of increase has been much lower. When year-to-
year fluctuations are smoothened out, and both the capital formation and
domestic product series are estimated at 1970-71 prices, the rate of gross fixed
capital formation in the closing years of the 1970s (about 18 per cent of
G.D.P.) turns out to be no higher than in the middle of the 1960s and only
about two thirds higher than in the middle of the 1950s (when it was about 11
per cent of G.D.P.).2
The working group took into account the fact that inventories may
have averaged around 2.5% of GDP during the 1970s, which was one
percentage point higher than earlier.
The main explanation offered by the committee was that the price
index of capital goods had risen faster than the GDP deflator since
1974/5. This is evident from the data given in Table 10. A note of
dissent appended by Dr S. P. Gupta and Dr Mahfooz Ahmad did not
question the above explanation, but raised the issue that the price
deflator for capital goods may not have reflected qualitative changes in
the composition of the capital stock.3 However, even allowing for the
point made by the dissenting note, it would appear from the above
analysis that the rise in incremental capital-output ratio may not have
gone up as high as Dr Rao and some other critics would appear to
think. The interesting question that then arises is, What can we infer
Current Issues of Economic Policy 55
from this increase regarding the efficiency of resource use?

To deduce any operational conclusion, one would need to provide at
least a decomposition of the increase in the ICOR according to sectors
contributing to GDP, on the one hand, and changes in capital pro¬
ductivity at the sectoral level (after making suitable adjustment for
variations in the lag structure of investments) on the other. Tables 4,6,
and 7 throw some light on these issues, even though no comprehensive
decomposition exercise has been carried out here.
If it turns out, for example, that in order to overcome the ‘land
constraint’, the country has to make additional investment in, say,
irrigation or power to feed the growing population, then it may be the
right thing to have done unless it can be demonstrated that the capital
requirement to generate the extra export earnings to import food for
the growing population would have been smaller in magnitude.
Obviously, the arguments for increasing the density of the transport
networks consequent on the increase in the marketed surplus of agri¬
culture would lead to a similar conclusion. Thus, it is quite clear that
without additional supporting evidence, we cannot deduce anything
more about whether the policy decisions taken were in fact erroneous.
Dr K. N. Raj has in a very recent paper raised some additional ques¬
tions in this regard, especially on a cross-country basis.4 He argues that
the increase in the incremental capital-output ratio has not been signi¬
ficantly different in India from what has been observed in many other
developing countries. It is worth quoting the following paragraph:
It will be seen that rise in incremental capital-output ratio has been an almost
universal phenomenon; that the only exceptions are the ‘least developed’
among the developing countries (presumably because current replacement
investment is relatively low in such countries); and that it has been sharpest
among the capital-surplus energy exporting countries (presumably for the
reason that massive investments in ‘modernization’ have been taking place in
these countries on an unparalleled scale).
Raj finds a possible clue to the increase in the capital-output ratio in

India, which on his own reckoning went up from 3.50 for the period
1951/2-1959/60 (excluding gross inventories) to 5.55 for the period
1970/1-1979/80, in Arthur Lewis’s observation that ‘infrastructural
capital costs tend to be very high in periods of urbanization’.
Raj does not discuss in this paper the inter-sectoral shift in the invest¬
ment pattern in the sixties and seventies, although he points out the
increasing amount of resources devoted to the energy sector in recent
plans. This is no doubt a very important point as the capital-output
ratio in energy production has been quite high in India, partly because
of the quality of resources (such as high-ash coal), or because easily
exploitable reserves may be getting somewhat exhausted. But behind
the rising energy demand, there are major structural changes going
on. It is an important fact that Indian agriculture has become far more
energy-intensive during the seventies as compared with the two
previous decades of Indian planning. When we refer to the increasing
energy intensity of agriculture, we mean not only the amount of electri¬
city consumed directly by agriculture, we also include diesel oil for
running pump sets and tractors, as well as the growing practice of
applying oil-derived chemical fertilizers. Thus it can also be seen from
Table 18, which is based on national accounts data, that there has been
a general increase in the amount of current inputs going into agri¬
culture. As a proportion of total value of output, the total value of
current input has gone up from about 0.197 to 0.275 over the period
1970/1 to 1981/2, whereas as a proportion of total inputs, energy-
related inputs purchased from commercial sources have gone up from
0.164 to 0.403.5 This steep increase has been made possible by greater
imports of fertilizers, crude oil, and oil-based products, on the one
hand, and greater domestic output in these sectors on the other. This
can be seen from Table 19, which demonstrates the rise in fertilizer
consumption. The point simply is that there has been both an increase
in capital (fixed and working) directly needed by agriculture, as well as
a change in the elements constituting the inter-industry matrix. The
combined impact of both types of change has implied that the economy
now has to devote a larger percentage of total investment to maintain
the same rate of growth in the final consumption of agricultural
produce than in the fifties and the early sixties, when agricultural
expansion largely took the form of an increase in the area cultivated.
Thus, the very nature of the change in agricultural technology, espe¬
cially in the areas affected by the Green Revolution, has disproved one
of the early assumptions of Indian planning: that with an abundant
labour reserve, agriculture constitutes a ‘bargain sector’, a point that
we touched upon earlier.
While agricultural and infrastructural requirements taken together
explain a considerable part of the rise in the incremental capital-output
ratio.6 I believe it is necessary to point out that Indian industry has not
shown any tendency for unit costs to come down with an increase in the
volume of output. To put it differently, while the agricultural sector
shows sign of diminishing returns, which has been in part mitigated by
the diffusion of yield-increasing innovations (even though as yet con¬

fined to a limited part of the country), industry has not displayed any
conspicuous signs of increasing returns to scale.7
What are the reasons for the phenomenon? Partly, I believe, that
public investment has shown an erratic pattern of growth during this
period—that is, the period from the mid-sixties onwards. This has led
to the emergence of excess capacity in some sectors and supply bottle¬
necks in others. Secondly, the rate of growth of real public investment,
excluding inventory investment, has slackened off from the mid-sixties
onwards. Thus, as Table 8 bears out, the rate of growth of public
investment fell from around 14% in the 1950s to around 3.4% in the
1960s. This is a phenomenon that we will need to discuss at some
length in a subsequent section, as the causes and implications are both
far-ranging in character. Thirdly, one has to take into account the fact
that the market for final industrial products in India, other than for
agro-based goods such as textiles, is still relatively small and not
growing fast enough, except for a few items such as transistors, syn¬
thetic fabrics, television sets, and the like.
There is as yet a relatively small domestic market for many of these
consumer durables, which is highly protected. While international
competition has been precluded at least thus far by government policy,
and this has led to the fact that benefits of cost reduction abroad have
not reached the Indian consumer, benefits of domestic competition
have not so far been notable because of the slow growth of domestic
absorptive capacity. Barriers to entry have been reinforced by the
government’s licensing policy, which has come under heavy fire,
leading to recent shifts in government policy.
Finally, it is worth mentioning that delays in the completion of
projects have also contributed considerably to the increase in the
capital-output ratio.8 It has often been observed by economists with an
Austrian persuasion of mind (and in this respect, Marx appears to have
been an Austrian too), that all economy finally boils down to the
economy of time. This is- a point that the late Andropov in Russia
seemed to have recognized in his speeches as well, while trying to
explain the recent slow-down in economic growth in the USSR.
In this respect, the experience of India has been highly unsatis¬
factory. Budgetary procedures are grossly inadequate from the point of
view of quick completion of projects. Gestation periods tend to be
lengthened because initial allocations of funds are insufficient. (This
reflects an attempt to spread scarce resources rather thinly over time
and space.) Then there is the additional problem of unsatisfactory

monitoring of the progress of major construction projects in sectors
such as irrigation, power, open-cast mining, and so on. Furthermore,
there is the protracted bargaining that goes on with the aid donors,
bilateral or multilateral sources from which technology or equipment
may be purchased. The multiplicity of sources from which technology
and equipment are obtained from abroad have also led to problems like
lack of standardization, the absence of spare parts, and similar pro¬
blems that add to investment inefficiency.
On top of all this, there is an element of politicization of public
investment decisions on matters relating to location which can also
raise investment costs.
While it is difficult to quantify the relative impact of different factors
outlined here on an economy-wide basis, one can study a sample of
cases and come up with a diagnosis which will help identify remedial
courses of action. While the Indian Planning Commission has con¬
siderable information on public sector projects, I do not know of any
completed study of a significant part of investment which will help
quantify the impact of these factors.
My hunch on the basis of experience is that procedural matters,
including lack of adequate monitoring, have possibly contributed to
the greatest extent in causing avoidable delays and hence overcapitali¬
zation of projects in sectors such as power and steel. Secondly, the
increase in prices of imported equipment has been a significant factor
from the mid-seventies onwards. Thirdly, lack of suitable upgrading of
technology has made the Indian capital goods sector a less attractive
source of equipment purchase, while imports have only recently been
liberalized.
Action correlates of these propositions are not difficult to discern. It
is difficult to maintain that the capital needed, directly or indirectly, to
increase the output of agricultural sector can come down in the
medium run—agricultural production based on new technologies will
need to be spread to areas where the level of infrastructural facilities is
still low, and increasing urbanization will mean that the productive
capacity of each remaining farming household will have to be inten¬
sified in order to feed the growing non-agricultural population. In
consequence, short-term relief will need to be found in the area of
management of major public enterprise units. I use the expression
‘short term’ because I believe that once infrastructural facilities have
been created in the eastern and central parts of India, agricultural
production is likely to show significant increase.9 There is no doubt

that relative to certain areas in the north-west and the south, these
areas suffer from what some have described as ‘semi-feudal’ relations
of production. It is not clear to me, however, that these relations will
not evolve once the opportunity of entering into profitable market
transactions is available.10 The crux of the problem would appear to be
one of suitable water management, along with provision of credit. The
former remains to be tackled primarily on a technical basis, although it
is not independent of social factors such as fragmentation of holdings,
the lack of consolidation of holdings, and so on. The volume of credit
disbursed in the eastern region through co-operative credit organi¬
zations is an exceedingly small fraction of what goes into financing
working capital for agricultural purposes in the west and the north¬
west, as can be seen from Table 28. This is primarily a matter of poli¬
tical mobilization of the small farmers, on the one hand, and provision
of adequate administrative support for infrastructure development, on
the other.
G. Myrdal came to the conclusion, at the end of his three-volume
Asian Drama, that completion of agricultural transition was a matter of
the highest priority for India. While Myrdal’s specific recommenda¬
tion on the precise way this transition has to be brought about (i.e. his
emphasis on capitalist farming) has been criticized,11 and with good
reason in my opinion, the basic conclusion cannot be denied. From the
statistics spanning the period from 1951 to 1981, it would appear that
the income per agricultural worker has continuously deteriorated rela¬
tive to income in the non-agricultural sectors,12 as implicit in Table 29.
This is true even after allowing for the change in occupational distri¬
bution shown by the 1981 census, which would suggest that the
percentage of the labour force engaged in agriculture has somewhat
declined.
If this trend remains unchecked, one can expect neither vigorous
industrial growth in the years to come nor any drastic decline in the
level of mass poverty which planners generally give as a major policy
objective. The analytical basis of these propositions will be discussed in
the next section.
Interdependence between Agriculture and Industry
The argument that a higher rate of growth of agriculture, other things

remaining the same, will exert a favourable influence on the rate of
growth of industrial production is, of course, a long-standing one. It

goes back to Sir James Steuart and, of course, to Adam Smith. In
modern days, many have argued along similar lines. A prominent
exponent—Nicholas Kaldor, who has dealt with the issue in numerous
places—attaches importance not so much to agricultural production
but to agricultural surplus. He wrote, ‘Indeed, the ratio of agricultural
production to the self-consumption in the agricultural sector, which is
invariably low in countries where agriculture is backward, is perhaps
the best available indicator of the “development potential” of an
economy.’13
For a closed economy, the argument put forward by Kaldor would
appear to be very plausible, for no better reason than the fact that food
constitutes the principal wage good. Income elasticity of demand for
food is known to be relatively high in poor countries. In India, it has
been often put at somewhere between 0.6% and 0.7%, which is
markedly higher than in developed countries.
If the argument put forward by Mahalanobis rested upon viewing
capital as ‘machines’, Kaldor’s argument here views ‘capital’ in the
early stages as primarily food advanced to workers, a very classical
concept indeed. How do the two arguments link up? One would
appear to suggest additional generation of agricultural surplus as the
first prerequisite for accelerated growth and industrialization, whereas
the other places emphasis on the building up of machine-making
capacity. In England, the industrial revolution, as is well known,
followed the so-called ‘agricultural revolution’, which was spread out
over a fairly long period of time.
Indian planners were not unaware of this sequence even when the
Mahalanobis model was adopted as the theoretical basis for the Second
Five-Year Plan. In fact, Vakil and Brahmananda went to the extent of
denying the validity of the entire logic put forward by Mahalanobis, on
the grounds that what mattered most in the early stages of growth was
to increase the elasticity of supply of wage goods, which meant food and
textiles.
As usual, the argument can be better understood by distinguishing
carefully between the implicit premisses. One of them is that agricul¬
tural production is more or less autonomously determined. As Kaldor
put it, ‘Agricultural production has an autonomous momentum which
is mainly dependent on the progress of landsaving, as distinct from
labour saving innovations.’14 This is obviously relevant for India, as
we have also argued earlier. But how does one bring it about? Here
Kaldor seems to understate the importance of ‘purchased inputs’ in

agriculture. As Table 17 clearly shows, in the post-Green Revolution
period, this ratio has gone up by a high growth factor. Mahalanobis
would have placed emphasis on this point, and looked upon the
increase of machine-building capacity as facilitating this process. The
argument was most explicitly stated in his reply to Myrdal, when he
reviewed the latter’s book.15
The other important point relates to the item ‘self-consumption’,
which can be regarded as a fairly elastic category or something very
rigid, depending upon circumstances. If the assumption is that there is
a fair degree of elasticity in both production and self-consumption,
then obviously industrialization can proceed a fair way from a low
initial base without getting aborted through price increase. The two
arguments can then be satisfactorily reconciled as a practical proposi¬
tion. In fact, they can even mutually reinforce each other. A judicious
mix of capital as ‘machines’ and capital as ‘wage good’ (e.g. food) can
lead to a faster rate of growth than an unbalanced mix. As a matter of
fact, during the decade of the fifties both industry and agriculture
increased substantially, especially the former, and the net barter terms
of trade were kept steady. Marginal propensity to save was also signi¬
ficantly positive, and the savings ratio went up substantially.16 While it
would be unwarranted to deduce from these facts that India had
followed any kind of optimizing trajectory, the reason for the above
experience was probably that agricultural production did not compete
in any significant way for scarce investible funds. The rate of growth of
agricultural production was to a significant extent brought about by
area expansion and better regional specialization, both largely once-
and-for-all increases. However, in the mid-sixties, industrial invest¬
ment stagnated and agricultural investment had to be stepped up to
compensate for the exhaustion of these two major sources of growth.
The question of striking a better balance between the two somewhat
different concepts of ‘capital formation’ arose in a rather painful way
during the seventies, and there had to be a change in both the nature
and pace of industrialization consequent on the changing input
requirements of agriculture.
We have so far assumed the case of a closed economy. But most
economies are ‘open’ to varying degrees, and the Indian economy is
also an open economy, although the ratio of both imports and exports
to GDP is rather low. In an open economy, industrialization can
receive a further push from import substitution, at least up to a point.
It has been argued by some that Indian industrialization in the first

part of its planning experience was based largely on easy import
substitution.
It is now held that during the mid-eighties, when India has reached a
high level of agricultural production—food grain production has
climbed from around 50 million tonnes in 1950/1 to 150 million tonnes
in 1983/4, and the government has accumulated a very comfortable
food stock of nearly 30 million tonnes—the emphasis should now shift
towards industrializtion, with an export market in view. In other
words, since India has achieved a fair measure of food self-sufficiency
and is in fact likely to meet a demand constraint for agricultural
products, the Kaldor argument, it is now held, justifies our shifting
attention to international trade in a much greater measure if we are
looking for acceleration of growth in industrial production.
The argument is not without some basis, for the strength of the
industry-agriculture linkage seems to have weakened somewhat over
three decades of planning. There are several ways of substantiating this
proposition. One way is to estimate the elasticity of GDP in manu¬
facturing with respect to GDP in agriculture. It may be seen from
Table 21 that during the 1950s this magnitude was of the order of 2.19,
but declined to 1.77 in the 1960s and rose slightly to 1.88 in the 1970s.
The coefficient for the entire period from 1970/1 to 1983/4 was 1.76.
The magnitudes are not significantly affected if lagged ratios are
computed.
Thus a qualitative change is clearly there, even though not as sub¬
stantial as some would argue. This change is explained possibly by four
major forces which have pulled down the growth-stimulating effect of
agriculture. First, the increase in agricultural production has been
very substantially confined to food grains, as can be seen from Table
14. Commercial crops which enter into industrial processing have
shown much lower rates of increase, posing constraints for industrial
expansion. This is corroborated by the decline in the elasticity coeffi¬
cient of GDP in manufacturing with respect to non-food grains pro¬
duction in the 1970s as compared with the 1950s, as shown in Table 22.
Secondly, the effect of a rise in the amount of purchased inputs used by
the agricultural sector has spilled over into the balance of payments,
creating a proportionately larger increase in the import demand for
petroleum and petroleum-based products. Thirdly, industrial pro¬
duction has been propelled to a greater extent than before by a fast rate
of increase in the demand for consumer durables, which are often
highly capital- and import-intensive. Fourthly, the Indian capital

goods sector has increasingly faced competition from imports, as a
direct function of the changed policies adopted. Thus, a substantial
increase in demand for oil exploration and drilling equipment has
stimulated demand outside the Indian economy, as these could be
better met from foreign sources. All these would imply that the nature
of the stimulus presented by agricultural growth may have weakened
in intensity during recent years. However, as we have noted, despite a
downward drift in the elasticity coefficient, the influence is still sub¬
stantial, as the coefficient is still about 1.8. If certain policy changes
which are desirable in themselves (or for balance of payments reasons)
are introduced, the picture can alter substantially. First of all, the
unbalanced nature of the product mix originating in agriculture still
plays a very major role in limiting the impact on industrial expansion.
The production of edible oils, other fats, and medium-staple cotton is
expanding at slower rates than grain production, as noted already—an
imbalance which needs to be corrected. This will require an appro¬
priate policy frame for agriculture which will allow productivity to rise
in ‘commercial crops’ within a very tight land budget. Thus, ‘land¬
saving innovation’, through increases in yield and multiple cropping
intensity, appears to remain very important. Along with these,
improvements in dry-land farming methods are very important as
parts of the country, such as the Deccan Plateau, are subject to very
precarious rainfall. Secondly, the importance of eradicating mass
poverty would suggest that a sustained increase in the availability of
food grains along with greater generation of employment oppor¬
tunities may remain the key factors for preventing social unrest for the
foreseeable future. Thirdly, since the growth rates of productivity of
different food crops have been far from uniform, wheat leading the list
by a large margin, we have a regional dimension to the problem which
is likely to pose an important constraint to the eradication of poverty in
the next decade.
Experience on the whole seems to suggest that possibly more is
needed today for rapid industrialization than maintaining a satis¬
factory performance in agriculture, particularly because agriculture
itself has become more import-dependent than before. If imports are to
be secured through greater exports, we have to secure greater levels of
competitiveness in manufactured exports. Or if we would rather
produce them at home, as in the case of items such as fertilizers and
chemicals, our productivity levels must rise significantly. Either way,
the efficiency of the industrial sector has to improve. In other words,

with an increase in the marketed surplus of food grains and an overall
increase in industrial diversification, priority may have to be given to
improving efficiency in the industrial sector. The question is how best
this increased efficiency can be achieved. An influential body of
opinion would suggest that the key lies in technological improvement,
and that this can be brought about most easily by increasing the ‘open¬
ness’ of the Indian economy. These are all issues which are currently
being debated within India, and we need to turn to them.
Technology, Capital Goods, and Growth
Technology is currently very much on the agenda of the government.

One widely diagnosed cause of India’s growing lack of competitiveness
in the international markets is the so-called ‘technological lag’. The
Indian economy is often described as a ‘high-cost economy’, and
among the factors responsible for the high level of costs, a prominent
role is given to the ‘obsolete’ nature of much technology utilized in
Indian industry. Within this diagnostic framework, it is no surprise,
then, that an attempt at quick elimination of this lag takes the form of
liberal imports of know-how and capital goods. Statistics on growing
foreign collaboration agreements and on the import of capital goods
would also suggest that the current government policy is indeed very
much influenced by the above diagnosis.17
It is, of course, too early to assess the impact of these policy changes.
But it may be useful to consider a number of analytical issues which
have a bearing on the problem of technological backwardness.
First of all, it is necessary to recall that the strategy of industrial
development adopted at the time of the Second Five-Year Plan did
recognize the need to overcome technological backwardness as a major
objective of economic policy. The importance that was attached at that
time to the development of a ‘machine tools sector’ within India was
based on the understanding that an efficient and diversified sector
producing machine tools was likely to help substantially the production
of capital goods over a wide spectrum of uses. Thus the development of
a dynamic capital goods sector in the broad sense was given high
priority. This analysis lacked neither a basic rationale nor historical
support. In an important paper which was first published during the
early sixties, N. Rosenberg, a prominent economic historian, pro¬
vided a useful analysis of the ways in which the growth of a capital
goods sector could help to raise both the rate of capital formation and
the efficiency of capital stock engaged in producing consumable goods.
Rosenberg’s analysis was backed by historical reasoning, which he has
since developed in numerous writings. It was Rosenberg’s contention
that
underdeveloped countries are doubly handicapped: low rates of capital forma¬

tion perpetuate low capital/labour ratios and therefore low levels of labour pro¬
ductivity; and the failure to achieve a well developed capital goods sector
means a failure to provide the basis of technical skills and knowledge necessary
to the development of capital-saving techniques and therefore a reinforcement
of the state of technical backwardness.18
It may be noted that Rosenberg traced the theoretical basis of his argu¬
ment to Marx’s analysis of ‘machinofacture’, and to the critical role
that Marx placed within machinofacture on the development of ‘vast
Cyclopean machines’.
Rosenberg’s analysis and Indian strategy during the fifties and early
sixties were logically congruent. The interesting question, then, is why
India today finds its capital goods sector relatively backward and
capital costs relatively high, so that rates of return on prospective
capital investment are low. This is a very major question. Fortunately,
on this question, we have a very useful contribution by Dr M. R.
Bhagvan, which gives a detailed analysis of the capital goods sector in
( India.19
Dr Bhagvan finds that the average annual rate of growth in value
added (at 1960 prices) of the capital goods sector was 7.2% over the
years 1960-80. However, he notices that while during the Third Five-
Year Plan (1961-5) the rate was as high as 19.4% , it then went down to
- 17.6% during the era of annual plans (1966-8). The situation did
not significantly improve during the Fourh Five-Year Plan (1969-73),
when the rate was - 10.4%. It was only during the Fifth Five-Year
Plan that a positive growth rate was again achieved (9.6%). Dr
Bhagvan did not work out the growth rate for the Sixth Plan, but my
estimate, derived from the official data, is only 6.23% per annum —
distinctly lower than for the Fifth Plan.
The declining share of capital goods production in total industrial
production is significant for explaining India’s current ‘technological
lag’. One of Dr Bhagvan’s major findings deserves to be quoted here:
By the early 1970s, India had achieved near total self-sufficiency in its capacity
to produce most of the standard modern capital goods required by Indian
industry. However, this remarkable manufacturing capacity has not been

accompanied by any significant acquisition of design-capacity. Thus, the
manufacture of technology continues along ‘outdated’ lines, based on the
knowhow imported in the 1960s and early 1970s from Europe and North
America . . . With the exception of machine tools, R&D developments in
public sector capital goods firms are stagnating with no significant techno¬
logical innovations to their credit. Equally, there is very little R&D work of
significance going on in the private sector. Incentives towards domestic R&D
activities and technological innovations are being severely undercut by the
continuing policy of liberalization of technology imports and of promotion of
technology agreements with foreign firms (agreements already add up to a
huge number).
I have quoted extensively from Dr Bhagvan to stress the following

points: (a) one cannot deny that Indian capital goods sector is today
outdated, the lag being of the order of around ten to fifteen years; (b)
this lag is partly explained by the switch towards imports; and (c) little
effort is being made either to improve design capability or to engage in^
R&D.
If these points are true, the present shift in the policy mix may be
creating more problems for the future than is generally recognized.
The fundamental idea on which the Rosenberg thesis rested was that a
‘capital-saving’ bias in innovation in developing countries was pre¬
dicated on the improvements in the efficiency of capital goods production.
The important analytical point was that any cost reduction in the
capital goods sector—whether it is labour saving or capital saving—is
‘a capital saving innovation to the economy as a whole’.
The present policy of liberal imports of know-how and capital goods
together may in fact be based on mutually offsetting forces. While
access to new knowledge is a positive factor for future growth, it should
be clearly recognized that accompanied by liberalization of imports of
capital goods on a significant scale, domestic costs of production are
unlikely to come down if the imports act largely as substitutes for
domesti£^£roduction. Inducement to invest may suffer correspon-
dingly unless the prospective demand for final products is large and
growing.
This brings me to the desired nature of the final product mix as a
determinant of technological choice. It should be quite clear that the
social value of technological improvement cannot be dissociated from
issues relating to the desired product mix. In a country where a large
proportion of the population do not receive adequate nourishment in
terms of calories needed, two issues would appear to be of paramount
importance: (a) more adequate production of goods directly and

indirectly geared towards ‘basic needs’, howsoever defined; and (b)
more productive use of labour without incurring excessive investment
cost on the worksite.
By the criteria of meeting ‘basic needs’ of the population, perhaps
the most important breakthroughs called for are in areas such as utili¬
zation of solar energy for pumping purposes, biotechnological changes
involving direct fixation of nitrogen in the soil, and other such
advances which make the large-scale import and investment of oil or
oil-based products less necessary. It may be said that these are highly
futuristic technologies, but there is little doubt that these technologies
are going to come, sooner or later. This means that adequate prepara¬
tion, including building up human skills and institutional infra¬
structure for these purposes, must proceed without delay. Similarly,
there is the need to extend crop genetic research to new areas.
If one considers that the so-called ‘non-commercial energy’ still
accounts for nearly 40 % of our total consumption of energy, the entire
perspective alters. To a certain extent, India has so far been able to
meet its energy requirements for a fast-growing population on an
extremely modest basis precisely because far-reaching ecological
degradation has provided the short-term cushion. However, this is not
the way to go about meeting the energy requirement for years to come.
The currently prevailing elasticity of energy consumption with respect
to gross domestic product is estimated to be around 1.3. One can easily
see that this is a figure which has serious implications for India’s tech¬
nology policy. In so far as commercial energy consumption is still
dependent significantly on coal—directly as coal, and indirectly on
coal through electricity generation based on thermal plants—tech¬
nological changes having significant implications for coal handling and
beneficiation, long-distance transmission of power, and so on would
appear to have priority over many others.
The difficulty is that there are short-term options that the market,
left to itself, would much prefer, especially if the pricing policy favours
a ‘convenience’ fuel such as diesel oil or kerosene. The rate at which
India’s hydrocarbon consumption has been allowed to increase since
1980 seems to indicate that pending further discoveries of large oil¬
bearing basins, India is likely to face a major energy crunch in the early
nineties or maybe even considerably earlier.
I have so far emphasized the role of energy-related options, which
are obviously very important from every point of view. From the point
of view of meeting the basic needs of the population, any advance in

techniques of ‘dry farming’ can go a long way to meeting the con¬
sumption needs of the poor. However, to date no very significant
advance has been recorded, although an international institute located
at Hyderabad has been carrying out work for some years now.
If the induction of new technology is largely influenced by consi¬
derations of short-term profitability, and if short-term demand is
significantly determined by India’s prevailing pattern of income
distribution, it is very likely that the impact of today’s liberalized
import policy regarding capital goods will be largely confined to the
sec!or^nung consumenSuraBEes^Whether this will serve as ‘incentive
goods’ for the Indian middle and upper classes and make them more
productive (an Indian version of supply-side economics), or whether it
will prevent large-scale smuggling of attractive luxury goods from
abroad, and thus help in saving foreign exchange, I cannot say with
any assurance.
My personal guess will be that smuggling will take new forms, as
such activity depends on a variety of considerations not all of which are
strictly economic. Likewise, the restoration of a ‘work ethic’ depends
on a variety of factors, in which social pressures must rank high.
The upshot of this discussion is to suggest the need for a technology
policy which is more closely rooted in the socio-economic priorities
which are still widely acknowledged as valid. Furthermore, they have
to be judged against a long-term perspective. We have already noted
that the continued development of a capital goods sector is necessary to
change the bias of technological change in a capital-saving direction.
We have also noted the great importance of land-saving innovations
for India, given its agroclimatic conditions and deteriorating ecological
conditions. These considerations do not preclude the introduction of
high technology into Indian industry if this improves the functioning of
key infrastructural items such as power, transport, and communica¬
tions, as any significant reduction in capital-output ratios in these
sectors can lead to substantial saving of capital for the economy as a
whole. But even in these areas the need for building up indigenous
capabilities is considerable. India’s technology policy for the fore¬
seeable future must emphasize the development of design capabilities
for sectors such as chemicals and fertilizers where a substantial growth
of demand can be expected and where existing capabilities are quite
inadequate. The present policy talks about avoiding repetitive import
of technology, but the practice does not confirm it. This is again an
area where effective action is called for, which will prevent monopoly
gains from accruing to certain privileged parties on the one hand and
avoid undue bureaucratization on the other.
Foreign Trade: Performance and Prospects
In our discussions thus far, we have had occasion to point out that the
inward-looking character of the industrialization process has been one
of the more persistent traits of the strategy of planning that India
originally adopted during the mid-fifties. We have also noted that this
decision derived from a specific understanding of the structural
constraints limiting Indian growth. There was more than ‘elasticity
pessimism’ that was at issue as the basic argument ran in terms of
SUt’SHht-hOr*
‘ability to transform’, although ‘elasticity pessimism’ doubtless helped
to buttress the argument. While the Second and Third Five-Year Plans
registered high rates of industrial growth even when the export perfor¬
mance of the economy was pretty unsatisfactory, thereby demon¬
strating the scope for growth based on domestic demand accompanied
by import substitution, from the mid-sixties onwards it was beginning
to be evident that the process of industrialization could not continue on
the same basis as in the past. We have already reviewed the perform¬
ance of agriculture and the problem that it posed for maintaining a
rising level of real public investment. When the agricultural policy was
being reviewed and reshaped (partly under duress), a group of scholars
and administrators boldly argued for a ‘devaluation’ of the Indian
rupee to make Indian exports more competitive, along with a policy for
the liberalization of imports.20. In the event, liberalization of imports
could not go very far because of the foreign exchange constraint—there
was no significant increase in the flow of aid consequent on the
devaluation of the rupee by a substantial margin, even though there
had been a general expectation in certain policy-making circles that
such transitional assistance would accompany any bold attempt at
opening up the economy. Exports also did not increase as anticipated,
and reasons for this have been much debated. Some have blamed the
timing of the devaluation, while others have argued that the effective
quantum of devaluation was much lower than the nominal one. Yet
others have argued that the supply elasticities of exportables were, in
general, rather low. Sectors such as engineering did show some
increase, but mostly because significant excess capacity had emerged
in the capital goods sector as a result of slackening in the tempo of
public investment. It may be seen from Table 27 that during the

seventies. Indian exports put up a much better performance. Between
1970/1 and 1981/2, exports increased nearly fivefold at current prices,
implying an annual average rate of growth of 15.9%. The quantum
index rose at a lower rate (around 7%), and the net terms of trade
moved against India from 1973/4 onwards, although the initial sharp
deterioration in the wake of the first oil-price rise was partly restored by
1977/8 until the second round of oil-price increase in 1979 pushed it
down again. During the years 1982/3 and 1983/4, exports at current
prices grew at less than 15.9%, the average rate of growth over the
period 1970/1 to 1981/2. The quantum index for these years is unoffi¬
cially estimated to have increased only by around 3% per annum.
The remarkable performance of exports from 1972/3 to 1976/7 was
due to the conjunction of several favourable factors, such as the
commodity boom of the early seventies which continued till 1974, the
opening up of a large market for Indian exports in the oil-rich Gulf
countries consequent on the first oil price hike, the increase in project
and turnkey exports, and finally to an effective devaluation of the
not performed as well since then? While detailed analysis cannot be

attempted here, the following major factors can be mentioned: (a) the
decline in import demand arising from developed countries as they
slipped into the Great Recession, since 1980; (b) the protectionist
measures adopted in developed countries, which negatively influenced
Indian exports in the areas of textiles, garments, shoes, iron and steel,
iron ore, and leather; (c) the fall in the unit values of some key Indian
exports; and (d.) infrastructural constraints within India in areas such
as power and transport.
Right now, export prospects look rather bleak, even though the
Seventh Plan, currently adopted, has projected a real export growth of
7%. The present fiscal year, 1985/6, is unlikely to show any export
growth even at current prices over the previous year.
Why is India’s performance on the export front so unsatisfactory
even when the export basket has been considerably diversified in the
course of the seventies, with non-traditional manufacturing exports
growing at a faster rate than total exports?
It may be argued that the Indian export environment was kept very
unfavourable domestically through the adoption of an inappropriate
package of policy measures. A contrast is drawn here with the case of
South Korea, which has shown spectacular export growth since it
switched from import substituting industrialization to export-led

growth in the mid-sixties. Why cannot India repeat the export
performance of South Korea? Before we attempt a few tentative obser¬
vations on this score, we should remove some obvious misconceptions
regarding Korea’s development experience. First of all, Korea did not
practise a ‘free market’ regime. It was a system greatly based on what is
called ‘administrative guidance’. Secondly, Korea’s educational
system was reshaped considerably to allow for the transfer of know¬
ledge. Thirdly, the government bureaucracy acted in very close
concentration with the business community. As a recent article puts it,
Here we should mention that the power of bureaucracy vis-a-vis business was
greater in Korea, since the power base of the government was in the army,
while in Japan political parties were dependent on business firms for contri¬
butions and government officials found employment in private companies
after retirement.21
Finally, it may be maintained that the political regime in Korea was

not particularly conspicuous for its encouragement of trade union
activities. Given these general features, it would, of course, still not
follow that Korea should have done as well as it did on the export front.
This can in part be explained by its ability to raise the savings rate from
15% in 1965 to 31% as early as 1974, a very sharp increase indeed.
Growth in the domestic savings rate implied that Korean productive
capacity could be significantly modernized as well as augmented to
bring about a greater degree of competitiveness in industrial products,
besides providing adequate infrastructural support. High marginal
propensity to save implied that potential output was realized in a
greater volume of export sales. And in switching over from a regime
based on import substitution, transitional difficulties were additionally’
smoothed by the significant inflow of foreign funds. As Blumenthal
and Lee point out,
In Korea, the import surplus was an important source of finance: the balance
of goods and services was negative for every year of the decade and the average
rates of external financing amounted to 36 per cent. Although the share of
domestic saving showed a remarkable increase, Korea still relied heavily on
foreign savings to carry the burden of domestic capital formation.
It would appear, therefore, ‘that while Korea switched its attention

to promoting exports, it also succeeded in attracting a large volume of
foreign capital, and simultaneously managed to find outlets for its
products—especially in Japan, where Korean goods displaced the
high-wage Japanese items. The phase difference in the real-wage

growth paths between the two countries was a useful factor, in as much
as Korea could move into producing and exporting commodities which
had been abandoned by Japan consequent on the improvement in its
real wage rates. Koreans seem to have also relied to a greater extent on
vertical integration to reap the benefits of scale economies, while the
Japanese had relied more on subcontracting as a source of procuring
intermediate inputs. Thus, when Korea opted to move from light con¬
sumer goods to heavy capital goods, it was able to secure the latest tech¬
nological know-how, a factor which was helped once again by its
Japanese connection and high investment rates.
In contrast with Korea, the case of India shows the role of‘tied aid’
in preventing the purchase of the most efficient capital equipment in a
number of different areas. There is little doubt that the consequent lack
of standardization and the initial import of relatively old technologies
have played an adverse role in key sectors, while the inadequate
maintenance and replacement have contributed towards making the
economy a ‘high cost’ one. Things were rendered worse in some cases
because of the Indian industrial policy, which did not show due regard
for the ‘scale factor’ in the design of projects.
I have described the Korean case in some detail as it is held up by
certain circles, both inside and outside the government, as an
exemplary one for India to follow during the coming decade. How¬
ever, even if India were to follow a policy leaning heavily on export
promotion, its export performance in the medium run will be have to
reckon with certain important constraints. The reasons, briefly are as
follows:
1. On present indication it appears unlikely that the world will expe¬

rience in the near future a rate and pattern of recovery which will
exert a significantly favourable effect on exports from less-
developed countries (LDCs), both in volume terms as well as on
their terms of trade.
2. As some of the major semi-industrialized countries also happen to
be heavily indebted, they will need to run export surpluses to pay
back their debts. This may imply severe competition in sectors
where India may wish to step up its exports.
3. Sectors where India can step up exports with little additional effort
but with a change of policy, such as textiles, will continue to receive
heavy protection in the rich country markets.
4. India is unlikely to be able to overcome the foreign exchange
constraint during the process of transition which any significant

shift from a relatively closed economy to an open one will entail.
These assumptions relate to the international environment, but

certain domestic factors must be mentioned as well. India’s infra¬
structural support base is not adequate enough for a major export
thrust, as everybody admits. However, improving it is not easy. India
does not run a very centralized system of management so far as infra¬
structure is concerned. Power supply, a major input into export
production, is mostly in the hands of state governments. The railway
management system leaves a lot to be desired, and the state highways
are not of the best quality, to put it mildly.
Improvements in these areas are in principle possible, but they
cannot be taken for granted. The size and heterogeneity of the country
pose major problems. Secondly, there is the problem of inflation.
Unless suitable domestic policies are followed, an issue I come to later,
the rate of inflation in India, in comparison with the rate currently
prevailing in the industrialized countries, will erode India’s competi¬
tiveness. Thirdly, there is the intriguing fact that countries which have
done particularly well on the export front also happen to be countries
with strong authoritarian political regimes. Some economists have
maintained that labour market conditions have played a major role in
the export success of the newly industrializing countries (NICs). The
evidence on this point is sufficiently important to make it pertinent to
raise doubts whether the open democracy that India maintains can be
equally efficient on the export front.22
The upshot of these observations is not to suggest that exports are
not important for India, or that exports cannot be stepped up in the
years to come. What I would like to stress is that Indian economic
realities cannot be wished away while making projections for export
growth. India should probably rely more on specific sectors with some
demonstrable export potential; devise a mix of policies that aim at
penetrating specific markets which are geographically or otherwise
well situated from its point of view; maintain an exchange rate regime
along with other competing countries; and minimize budgetary bur¬
dens while ensuring that exporting remains a profitable activity. While
domestic demand, in my opinion, will provide the major source of
growth, exports can play an important supporting role.23
However, before we conclude this part of our discussion, it is neces¬
sary to take into account some recent ‘liberalization measures’ adopted
in the context of import policy—the so-called ‘open door’ policy.
There is an expectation, strongly held in some circles, that with the

adoption of a more liberal policy of imports of capital goods and tech¬
nology, the Indian economy will be able to reap the benefits of a
rational international division of labour, something which its so-called
inward-looking policy has prevented so far. There is little doubt that
there have been periods when in the name of import substitution, rela¬
tively low-cost options involving imports were not taken up. Whether
the learning effects did not take place because the domestic demand
was wrongly estimated, or because the technology in question was
inappropriately chosen in the first instance, or whether it was the
general slowing down of the rate of increase of real public and private
investment which prevented the scale economies being reaped, can
only be very approximately established. My personal guess is that none
of these explanations are mutually exclusive. It is possible that they
operated with varying degrees of intensity in different sectors.
As a very rough guess, I believe that in sectors such as steel, the need
today is for energy-saving modifications in technology along with flexi¬
bility in product mix, rather than large-scale changes; whereas in
sectors such as fertilizers, the need is for well-supported design and
organization divisions to be set up so as to provide for the assimilation
and upgrading of technology on a continuing basis. In electronics, it
has been said, the lag is especially great. The present government
seems to be of the opinion that a very significant alteration of the policy
framework is necessary, and accordingly steps have been undertaken
to encourage a large number of foreign collaboration agreements as
well as to allow the import of components for assembly purposes.
From an overall social point of view, it is not very important whether
one particular segment of a particular industry is rendered obsolete or
not. After all, ‘creative destruction’ is a necessary part of a growth
process, if one takes a Schumpeterian view. Flowever, it is important
that imports do not merely substitute for domestic production; on
balance, they must lead to a substantial increase in production or
productive capacity if a potential balance of payments crunch is to be
avoided.24
The idea that liberalized imports are likely to stimulate export
growth is not altogether without foundation in a few sectors such as
engineering, but it is possibly too facile to extend it to the whole indus¬
trial spectrum. In this respect we need to learn a great deal from the
experience of a country like Japan, especially from what Japan did in
the mid- and late-fifties. Possibly it may be useful to draw a few lessons
from the way the Ministry of International Trade and Industry

(‘MITI’) operates.25
In my judgement, India’s balance of payments is likely to come
under pressure unless we carry out a policy of import substitution in
certain crucial sectors. These sectors include energy (especially the
replacement of imported hydrocarbons by greater domestic pro¬
duction of oil, gas, and coal), edible oils (which rank today next to
mineral oil in our list of imports), and nitrogenous fertilizers. These
are sectors where demand is large and fast growing. There is little
doubt that India has been able to manage a rate of growth of GDP of
around 4.5 % with a very low debt profile for the last ten years because
it did not have to import food in large quantities, and succeeded in
raising domestic oil production substantially from a fairly low base in
1974. In the years to come, one can expect the tempo of increase in oil
production to slacken and the gap on the edible oils front to widen
unless major steps are executed with suitable expedition. While the
former is partly a matter of luck, the latter would relate to more
effective planning within the agricultural sector itself, where signi¬
ficant inter-crop imbalances have emerged.26
Resource Mobilization and Public Sector Investment
If exports cannot play the role of prime stimulus to industrial growth,

at least in the second half of the eighties, what can? Here, I revert to a
theme which I have touched upon at different places. It may be recalled
that in my analysis of the Indian experience, I attach a lot of impor¬
tance to the task of completing India’s agrarian transition. To
complete this transition, I think that public investment will have a
leading role to play, in the form of providing infrastructure as well as in
providing necessary research and development support. The results of
the econometric analysis given in Table 16 show that there is a signi¬
ficant relationship between public investment in agriculture and
private investment undertaken by the farmers. In addition, there is the
need to upgrade the quality of human agents, through appropriate
investment in health, education, and nutrition. I believe that an
increase in the agricultural surplus can in part play the same role as the
effect induced by the foreign trade multiplier in a small open
economy.27 This is because of the size of the country, the very different
resource bases of different regions of the country, and the limited
mobility of unskilled labour between different regions. Statistical
evidence for this proposition is also available from those parts of the
country where the growth of marketed surpluses has been accom¬
panied by the local growth of processing industries and of tertiary
sectors catering to agricultural requirements.28 Recent census data
show that in these areas, the change in the occupational pattern away
from agriculture has been particularly pronounced, suggesting a dimi¬
nishing pressure of population on land. The same conclusion is
supported by the National Sample Survey data. A sustained increase
in agricultural productivity can significantly help to widen the market
for industrial products on the all-India level as well, enabling econo¬
mies of scale to be reaped for most industrial products, especially
industrial consumer goods.
It would appear, therefore, that sustained growth of agricultural
productivity can help usher in a system of self-reinforcing feedbacks
which can lead to a more pronounced rupture in what has effectively
been an ‘occupational stasis’, even though the 1981 census has for the
first time shown a limited break with the occupational pattern which
has persisted for more than half a century.
The key question, then, is: Can India secure resources for stepping
up the rate of public investment? If mere stimulation of monetary
demand could do the job, there is obviously an easy way out. However,
I do not believe this is a wise course to follow. There are obviously
many slacks in the system, but they are not in the areas which can be
significantly activized by mere stimulation of monetary demand
through what is called deficit financing, which amounts to little more
than printing money.29 Can one think of doing it through taxation? I
have had occasion to refer to Kalecki’s views on the Third Five-Year
Plan. Among his observations, he made the point that prices of neces¬
sities should not be raised through taxation. He was of the opinion that
taxation should be used primarily to restrain the rate of growth of
luxury consumption, and not as an instrument for reducing the level of
mass consumption as it is low enough already.
However, this is an issue which can only be discussed with adequate
reference to fiscal sociology, an issue to which Schumpeter drew atten¬
tion in one of his brilliant but less well known essays, ‘The Crisis of the
Tax State’ ,30
If one looks at India’s tax policy as it has evolved over the last thirty
years of planning, one notices a significant increase in the tax-to-GDP
ratio over the period as a whole, as may be seen from Table 30. This
increase is largely due to an increase in indirect taxation. Even more
important, a very large part of the revenue through indirect taxation is

raised from a handful of commodities (which include several major
industrial intermediates), which leads to significant cascading effects.31
In addition, heavy import duties, including high duties on capital
goods, were levied primarily to raise revenue, but were also justified on
the ground of ‘self-reliance’. Direct taxes on incomes in organized
sectors were kept nominally very high for a long period, but their
collection seems to have left much to be desired. Evasion was always
widely spread, and increased over the years. A programme of tax
reduction started in 1976, but was most notably accelerated in the fiscal
budget for 1985/6. There seems to be a kind of consensus amongst
fiscal experts that a nominally higher marginal tax rate does not corres¬
pondingly imply a higher level of tax revenue. In fact, it may lead to the
enlargement of the so-called ‘black economy’, whose size it is difficult
to estimate but impossible to ignore.
The present policy changes have been hailed as bold measures by
some people, mostly businessmen and upper-income professionals,
but in my opinion do not touch the heart of the matter.
This relates to the fact that India has seen a proliferation of the
unorganized industrial sector which is an almost complete tax haven.
Furthermore, while agriculture has prospered in many states and has
created a large class of prosperous farmers, there is hardly any attempt
at raising resources through direct taxation. What is more, both the
unorganized industrial sector and prosperous agriculture receive signi¬
ficant subsidies, such as fertilizer, power, and irrigation, as can be seen
from Tables 31 and 32.
We are therefore faced with a situation where, for the first time in
India’s planned development, the balance from current revenues at
1984/5 rates of taxes for the Seventh Plan period (1985/90) is placed at
-Rs.52,490 million.32 So far as India’s budget is concerned, the
balance from current revenues works out at - Rs. 120,110 million for
the same period. This is explained by large increases under three
headings: subsidies, interest payments, and defence. While expen¬
diture on defence is explained by factors largely exogenous to the plan¬
ning process, the other two items do directly reflect the method of plan
financing adopted, as well as the changing balance of class forces, as in
particular they reflect the transformation of rich peasantry from being
a ‘class in itself to a ‘class for itself. We should note that the govern¬
ment budget has come under pressure even when the government is
faced with a favourable succession of good monsoons—again a matter
of some contrast with the pre-Green Revolution years, when govern¬

ment resources dipped only when harvests failed on a large enough
scale.
Can we reasonably hope for a large step-up in the rate of real public
investment, given the present constellation of social and economic
forces? In fact, there is a growing body of public opinion that would
appear to favour a policy of encouraging upper-class consumption on
the ground that this would stimulate private investment through the
usual acceleration-type mechanism as well as through incentive effects.
Their logic would appear to be the following. Indian consumer goods
are currently overpriced because of scale diseconomies as well as tech¬
nological obsolescence. On top of these two structural factors, they
bear heavy indirect taxes. The argument runs that if indirect taxes
were to be very significantly reduced, these reductions would be
passed on to the consumer and demand would widen substantially.
Combined with liberal imports of latest-vintage technology and the
choice of optimum scale, India will progressively be able to move
towards a ‘low-cost economy’, which will also make it internationally
more competitive. In this strategy, domestic demand is given some
importance, but only in 60 far as it affects the top 10% of the
population.
There are, however, two major snags in this argument, apart from
issues of equity. First, infrastructural constraints, especially in the
form of power, are highly capital intensive in character. Even if the
share of public investment in total investment is reduced, this will only
mean ‘financial savings’, as a lot of potential output may be lost
because of non-availability of power, transport, and so forth. Some
substitute for public investment must be found in these areas.
Secondly, there is going to be an adverse impact on the balance of pay¬
ments situation resulting from liberal imports of capital goods which
will act at least initially as a substitute for domestic production.
Furthermore, this direct effect will be strengthened by the import of
oil, which always goes up whenever there is power shortage arising
from fluctuating generation accompanied by generally insufficient
investment in transmission and distribution. The policy, therefore, is
likely to generate in the first instance short-term rents to certain
sectors, inflationary problems in the economy as a whole, and addi¬
tional problems for the balance of payments. Only through the sus¬
tained inflow of external capital, along with the social and economic
costs of increased dualism, can this policy be made to work.
Under the present constellation of forces, the ability to maintain a
satisfactory rate of growth of real public investment seems to me essen¬

tial as a growth-promoting force. However, this does require major
decisions aimed at mobilizing resources from sectors which have
significantly benefited from the development process. The Seventh
Five-Year Plan proposes to raise the tax-to-GDP ratio by two percent¬
age points, and also projects large-scale stepping up of surpluses from
public enterprises. Both these propositions face severe difficulties. The
first proposition is opposed usually on grounds of difficulties of imple¬
mentation, especially because they tend to be costly in terms of admini¬
strative inputs. However, it is not clear that administrative difficulties
are necessarily as great as they are made out to be. More importantly,
the major areas for resource mobilization today are all directed by
pressure groups, which in the atmosphere of competitive politics tend
to be opposed to any form of taxation, or for that matter even to
concede the need for payment for services provided by the govern¬
ment.33 The second proposition is a function of the level of efficiency in
the operation and maintenance of the public sector. While the scope
here is considerable from the point of view of sectors such as coal, trans¬
port, steel, and fertilizers, the type of managerial culture that is needed
to realize a higher level of productivity of capital and labour cannot be
reached with the present style of running public enterprises.
Meanwhile, the fact that the present financing system continues to
operate without generating large-scale inflationary pressures is due to
a combination of two factors. First of all, public investment has been
heavily biased in favour of infrastructure, and very legitimate demands
from sectors such as health, education, and housing have been treated
sparingly. Secondly, with the system of nationalized banking that
India has adopted, the government has been able to secure com¬
mand over financial savings of the community at largely negative real
rates of interest. This has been aided to a certain extent by the financial
deepening that India has experienced, a matter of some positive
significance.34
It is not difficult to see that both these devices have serious limita¬
tions. The first has hurt India more than official thinking admits, as
large human resources remain untapped. The second has technical
limitations which render the monetary authorities incompetent to
regulate the money demand for goods and services, should the need
arise following harvest failures and/or a ‘foreign exchange crunch’.
Without going into the details, I may hazard the following proposi¬
tion. If India is to achieve a rate of growth of around 5% per annum,
along with single-digit inflation and some alleviation of poverty,

methods must be found to broaden the tax base, to use existing capital
and labour resources more efficiently, and to provide adequate outlays
on certain forms of public consumption such as health, education, and
nutrition, while also ensuring more equal access on the part of deprived
sections of the community.
The policy mix that India is going to evolve during the eighties must
pay due attention to each of the points mentioned above.
6
Conclusion
An Overall Assessment
What are the major conclusions that one can draw from India’s expe¬
rience with development planning? First of all, I should like to sound a
note of caution. History shows that perceptions of India’s development
prospects have not stayed the same over the last three and a half
decades. During the fifties, India’s development prospects were rated
rather high, inside the country as well as outside. It had a very stable
government, an educated elite of sizeable dimensions, a commitment
to planned development, and very low defence spending. The logic of
Indian development plans, although not universally appreciated, did
on the whole fit in with what contemporary development economics
had held up as a viable model to follow, especially for a large country.
Those who believed in the welfare state as an answer to the pro¬
blems that faced developed capitalism saw in the Indian plan model a
genuine possibility that escapes from low-level equilibrium could be
found through the mixture of institutional motive forces that the
plan projected. Indeed, Nehru’s vision of a mixed economy moving
towards a socialist pattern of society appeared to theorists of reformed
capitalism as an answer to the challenge posed by the model of
growth presented by Mao’s China. During the sixties, the atmosphere
changed drastically. Two successive droughts, the declaration of‘plan
holidays’ for three years, and large-scale imports of food grains
under US Public Law 480 brought about a great change in the inter¬
national perception. For a while India appeared to be a ‘basket case’,
and not a model for others to emulate. Internally also there was ini¬
tially great uncertainty. The savings rate dropped, excess capacity
emerged in ‘basic sectors’ such as steel and capital goods, and there
was fear that maintaining food availability per capita was going to be
a very great problem in years ahead. However, from the experience
82 Conclusion
of the initial feeling of helplessness a new strategy for agricultural

development was forged, based on a pronounced technocratic
approach as described in Chapter 3. Unlike what radicals had forecast,
the system did not break down. At some cost in economic and social
terms, production revived in agriculture, especially in food grains
(particularly, wheat), and India avoided the calamity which many had
predicted. Ten years after the drought, when there was much criticism
of the domestic ‘emergency’ then prevailing, economic indicators were
all'pointing upwards. A comfortable balance of payments, bumper
food crops, and high growth rates of industrial production made it look
as if India were doing very well on the economic front. The late
seventies saw renewed political uncertainty, but in the first half of the
eighties India turned out to be one of the few countries which main¬
tained a growth rate in gross national product exceeding 4% per
annum on a trend basis, along with single-digit inflation in most years.
In fact, the Sixth Five-Year Plan (1980-5) achieved an annual average
rate of growth exceeding 5 %. This happened when the world was
passing through the Great Recession, when the high performers in the
growth league of the sixties and seventies, such as Brazil and Mexico,
were mostly recording negative or only mildly positive growth in GDP,
and with per capita output levels showing large dips all through. Orie
has a better appreciation of these facts when one takes into account that
Indian plans have been largely internally financed. India’s debt service
ratio as a proportion of export earnings during 1983-4 was 11.6%,
while in 1984-5 it would have gone up to around 12%. These numbers
indicate that thus far, India has managed its external payments posi¬
tion with prudence. One key to this macro-economic performance has
been the substantial increase in food grain production, which went up
on a peak-to-peak basis by 20 million tonnes in the course of five years
(from 131 million tonnes in 1978/9 to 151 million tonnes in 1983/4).
That this increase was not fortuitous is underlined by the fact that
production in 1985/6 may slightly exceed this figure, despite relatively
poor weather conditions in the Kharif season of 1985, which depends
heavily on the monsoon.
What can one infer about the success of Indian development plans as
one surveys the scene spanning the last thirty-five years (1950-85), a
period long enough to warrant some statements of a relatively robust
character? First of all, India’s macro-economic performance has been
only moderately_gQ.o_d.in terms of GDP growth rates. Allowing for the
fact that for the better part of the entire plan period, population has
Conclusion 83
increased by more than 2% per annum, the growth in per capita

income on an annual average basis has been somewhat less than 2 %
per annum.1 While it does not compare favourably with the experience
of the so-called NICs, compared with India’s own past (1900-50) the
growth acceleration has been impressive indeed. While it will remain
an undecidable issue as to how much of this acceleration has been due
to the change in the world economic conjuncture since World War II,
and how much due to India’s own efforts at planning, the rise in the
domestic savings rate from around 10% of GDP in the early fifties to
around 23% currently is generally judged as impressive. Secondly,
while India has had to reckon with a fair measure of inflation from time
to time (1965-7, 1972-4, and 1979-80), the awerage rate of inflation
has been a very modest one by international standards. Most often,
these inflationary episodes have been triggered offTDy’massive harvest
failures or a sharp rise in international prices of essential inter¬
mediates, and most often they were brought under control without
resort to large-scale foreign borrowing. There have been two major
reasons for this success. One is the ability to maintain a rate of growth
of food production of around 3 % per annum over the period as a
whole. The other is the financial deepening that was experienced by the
country, which allowed domestic savings to go up in a monetized form.
As Nicholas Kaldor and others have often emphasized in the analysis of
Latin American inflation, the inflation proneness of Latin American
countries has been in large part due to their neglect of food grain agri¬
culture. The deepening of the financial structure has succeeded
because the government has attached a lot of importance to both
supply and demand management whenever inflation has exceeded a
single-digit figure. While this has to a large extent been prompted by
consideration of political legitimacy (an open democratic system in a
poor country being generally less tolerant of inflation than authori¬
tarian regimes), it has, in the long run, helped to increase the savings
rate by helping to maintain confidence in the ‘standard of value’. How¬
ever, much of the increase in savings has taken place in the household
sector. This has involved an inter-sectoral mismatch between the
increase in savings and the increase in demand for investment. The
public sector, whose savings have not increased proportionately, has
been obliged to rely, in growing measure, on borrowing from house¬
holds. This is the crux of the problem of plan financing in the context of
the currently formulated Seventh Five-Year Plan. This problem not¬
withstanding, the increase in the aggregate savings rate has on the
84 Conclusion
whole been a stabilizing influence on the macro-economics of India.

However, some economists may question whether stability has not
been purchased at the cost of some growth.
On the side of industrial planning, Indian plans have operated on
the basis of an inwm^d-lookmgdevHo^mentstrategy, the outlines of
which were sketched in the Second Five-Year Plan. While we have
analysed this strategy for its logical underpinnings as a theory of the
‘traverse’, new light has been thrown on this strategy by the resilience
that India’s balance of payments displayed during the period 1975-84.
While a broad-based industrial structure with an orienta^gntothe
homemarketma^wr^well have deprived India of some of the gains
from trade in an expanding world economic environment, in a global
downswing it has so far stood the economy in good stead. Clearly,
whether a country should pursue an outward-looking or an inward¬
looking policy is not an issue that can be decided on the basis of first
principles only. One has to reckon not only with the size and composi¬
tion of a country’s resources, but also with the nature of the world
economic ‘conjuncture’. This last issue was much discussed during the
inter-war period, a point that was missed by policy-makers in many
developing countries in the sixties and seventies. Thirdly, there has
been considerable capital formation in human terms. While the
country’s export of skilled manpower cannot be regarded as an
unmixed blessing and does reflect an imbalance in manpower plan¬
ning, workers to draw upon,
even if the level of efficiency varies a great Heal across sectors.
—i—nrmni’rT’P'MaBagi^aifctl^1* ini —wit""
Can we draw from these facts that India’s development planning has
been on the whole a great success? I believe that it would be just as rash
to draw such a conclusion as to dismiss Indian planning as an essay in
failure. Neo-classical economists are horrified by the inefficiency of
resource allocation in India, which implies a considerable loss in poten¬
tial welfare as they understand it. On the other hand, radical econo¬
mists of varying persuasion see in Indian planning an attempt by the
ruling elite to deprive the masses of the surplus product they have
themselves generated. For the first group, India has erred heavily by
following a regime based on quantitative controls, apart from fol¬
lowing mistaken choices regarding sectoral development strategies.
Many of them would have preferred India to follow a ‘textiles-first’
strategy, supplemented by large-scale import of capital goods from
abroad. For the second group, Indian planning has been an exercise in
primitive accumulation, and hence no different in character from
Conclusion 85
capitalist-oriented strategies followed elsewhere. I believe that there is

some truth in both contentions. There are many areas of production
where inefficiency is fairly widespread, as in the generation of power,
transport, steel, and fertilizers, let alone high-cost consumer durables.
However, I do not believe that these are strategic mistakes, but rather
reflections of faulty design and implementation. There is no inherent
reason why plant load factors in thermal power stations have to be
around 50%. They can be raised, and raised substantially, by better
maintenance, prompt delivery and quality control of coal, redesign of
boilers, and so on. Similarly, production from integrated steel plants
can be significantly increased through modernization and a greater
realization that steel is not a homogeneous product but an ‘engineered’
one.
So far as the radical critique is concerned, the fact is that serious
problems have been caused not so much by a significant part of net out¬
put being appropriated by property-owning classes, especially in tradi¬
tional agriculture and large business, for no better reason than that
they own the means of production (which are in short supply) and have
access to decision-making centres, but by the inability to generate suffi¬
cient employment opportunities and ensure adequate production of
the basic necessities of life.
The result is that while India has doubtless scored some success with
the type of planning that it has practised, it has left a large number of
people below the poverty line. The 32nd National Sample Survey
showed that in 1977/8, the proportion of the population in rural areas
living below die poverty line was 5T2%. whereas the corresponding
figure for urban areas was 38.2%. According to the 38th Survey
(1983/4), the figures have recently undergone a sharp downward
revision, to 40.4% for rural areas and 28.1% in urban areas. Even if
these figures were accurate and comparable, they would still indicate
the gross poverty that exists in the country, as the norm used for these
purposes is based principally on caloric intake.
What are the causes of India’s persistent poverty? What does one do
about it? Does it imply a basic deficiency in the design of development
plans? These are some of the questions which are likely to occur to
anyone interested in Indian problems. It should be evident from our
discussions that it was not because Indian planners had decided that
poverty would, willy-nilly, grow in the earlier years of planning and
come down later, following a Kuznets-type pattern. They started
worrying about distributional issues from the early sixties onwards, in
86 Conclusion
-very explicit terms. If the problem still persists in a serious form, as it

doubtless does, one would need to ponder all the more on the issues and
remedial courses of action.
Poverty Alleviation: Problems and Prospects
An easy answer to the problem of poverty is that India must reduce her
population growth to get over the so-called ‘poverty barrier’. I believe
that there is a considerable amount of truth in this perception, espe¬
cially if one were to go by the long-term requirement of having an
appropriate balance between population and resources, renewable and
non-renewable. But I think that the problem of population reduction
cannot be seen in abstraction from socio-economic considerations. It is
intimately connected with the production and distribution processes
which operate in India’s traditional rural economy. More investment
in family planning, while welcome per se, cannot by itself bring about
the needed reduction in the population growth rate. What is needed,
above all, is to change the nature of demand for labour from one of
quantitative expansion to one of qualitative upgrading. This is a point which
is not always perceived by family planning enthusiasts as it relates to
the whole pattern of work organization in agriculture and other rural
activities. With the type of production processes which prevail in large
segments of agriculture and mediate the redistribution processes, a
large family size is often prized by peasant families and agricultural
labourers as a way of increasing their incomes, a fact from which
purely biomedical devices cannot offer an escape route.
India’s social structure is rigid and hierachical, and on top of it,
commercialization has deprived it of such ‘communitarian’ elements
as it may have had fifty years ago. From the economic point of view,
the Green Revolution, as we have pointed out, has so far been largely
confined to wheat, cotton, and to much lesser extent rice, while the
situation in regard to edible oils, pulses, and coarse grains has, by
and large, deteriorated. The result has been the emergence of an
unbalanced cropping pattern. Infrastructure conditions helped in
bringing about the ‘wheat revolution’, along with human efforts,
public and private. No such concentrated effort has so far been devoted
to the crops which cater to a more nutritious diet. Even rice yields have
risen very slowly in comparison with wheat, especially in the Gangetic
plains. Water management is the key problem here, but it is not merely
an engineering problem. It is also pre-eminently a social problem as it
Conclusion 87
has to do with problems of land consolidation, access to irrigation

water, credit for buying pump sets, and so on. If land-saving and
labour-saving innovations could be brought about through providing a
better balanced package of the above inputs, especially in eastern and
central India, then there are reasons to expect an accelerated decline in
population growth in the medium run which can break the low-level
equilibrium in which these parts of India are largely trapped today. In
the absence of sizeable and well-conceived plans of development for
these areas, it is only to be expected that inter-regional inequality will
grow, resulting in increasing social tension as well as loss of potential
output.
There was a time when it was assumed by many economists that
India will need to change its occupational structure quickly to get over
the problem of poverty. In simpler terms, proportionately more people
will need to be employed in industry, which will reduce the relative
overpopulation in agriculture. Largely as a result of population growth
but also in part because of the strategy of industrialization adopted, this
has not happened to any significant extent. While the 1981 census
shows some change in the desired direction on an all-India level, a care¬
ful look at the data would show that outside the Green Revolution areas
and Maharashtra these changes are not beyond the error margins.2 A
point sometimes has been made that with an increased orientation
towards export of labour-intensive manufactured goods, and liberal
imports of high-technology products, India could have generated more
industrial employment than through pursuing its inward-looking
approach. Even if this were true for the sixties, which is not obvious,
the present world economic situation hardly supports such a con¬
jecture. Secondly, in the long run, where does and how does India find
reasonably cost-effective substitutes for non-commercial sources of
energy, as its ecological environment continues to deteriorate?
I think that the basic strategic questions for India in the coming years
are the following. First, can India make small farms viable farms? Can
India carry out large-scale public works involving large labour inputs
which are not ‘make-work’ programmes but result in the large-scale
creation of productive assets?3 This is, of course, not to deny that India
has engaged in some inefficient import substitution, which needs to be
phased out. It was the increased hiatus between the evolving income
distribution and the desired pattern reflected in the plans which was
primarily responsible for these inefficiencies, even though there is no
denying they have been aggravated by government policies. This
88 Conclusion
points to a major deficiency of the method of development planning

that India has followed, a deficiency that we have discussed in con¬
nection with resource mobilization as well as in regard to methods of
plan implementation. Moreover, this deficiency is unlikely to be
removed merely by ‘opening up the economy’, an idea which has
gained popularity in very recent years.4 While India’s price-cost
relationships for the tradeable sectors ought to be brought into closer
alignment with relationships which prevail internationally, given the
size of the country, its diversity, and the large-scale underemploy¬
ment, it is only over a period of time that divergences can be signi¬
ficantly reduced. Meanwhile, the Indian economy will have to look for
solutions which are inherently ‘second best’ or ‘third best’ in terms of
the precepts of neo-classical welfare theory. But there are serious
reasons to doubt whether these precepts have much applicability so
long as India harbours multiple economies. The solution to the
problem of rural poverty will require that small farmers must also be
given access to land-augmenting innovation along with a programme
of well-conceived public works. Both these make considerable demand
on available services and organizational capabilities as they cannot be
merely directed from above—many of the specific tasks will need to be
done on a decentralized basis, a point I have emphasized in connection
with problems of plan implementation.
One cannot help concluding that India’s development pattern has
exacerbated the ‘dualism’ that was there at the start of the development
process itself. This can prove fairly corrosive if it is left unchecked.
However, it is not planning as such that has done it; rather, it is the
product of lack of appropriate planning. Some Indian economists are
today looking much more eagerly towards the free market, in keeping
with a widely discernible trend all over the world. But while market-led
growth patterns have proved themselves efficient in some cases, this
has generally been at the cost of equity. India may well need to get
rid of some features of its complex regulatory framework and give
greater scope to market signals, but it will need to take countervailing
measures on redistributive policies.5
A redistributive programme is unlikely to work in isolation from the
pattern of growth that India is able to generate. Regularities that
characterize the circular flow of income would suggest that ineffi¬
ciencies may be implied by anti-poverty programmes which do not
improve the operating efficiency of production processes. While the
first round of putting money into the hands of the needy may relieve
dire necessities for a while, the effects tend to be highly transitory in
Conclusion 89
character as such programmes do not improve the capability to earn

more on a steady basis. While some supplementary consumption in
relation to selected target groups has a proper place in the design of
redistribution in a country like India, the more pressing necessity is
still for investment for both material and human capital formation.
It may be argued that India has a high enough savings rate already
and does not need any more. Comparisons involving savings rates and
the rate of growth of GDP do not contradict the conventional wisdom
that higher savings play a major role in sustaining higher rates of
growth. This is not to deny that greater efficiency in resource use is also
urgently called for. Such exercises as have been carried out on total
factor productivity growth, despite methodological deficiencies, sug¬
gest that greater attention need be paid to this class of issues.
But we have already seen that the data are not unambiguous as to the
extent of the increase in domestic capital formation that increased
savings has rendered possible. If one were to accept fully the conclu¬
sions of the Working Group on Savings, it would be difficult to deny
that India has to increase its current rate of savings substantially.6
Issues that bear upon India’s development prospects are inevitably
very complex. Moreover, they cannot be devised merely by techno¬
cratically inclined civil servants. While technocrats can obviously
suggest more efficient means for pre-assigned goals, the problem of
goal-setting is inherently a socio-historical process. Societies which
have grown fast during the recent period have done so not because the
sum total of problem-solving effort has been vastly greater in any
measurable sense, but because they could succeed in evolving a broad
consensus on priorities.
If Indian society values growth with equity, as plan documents
repeatedly emphasize, India has still a long way to go in adapting insti¬
tutions and aspirations in that direction. Neither the recently discussed
virtues of the free market mechanism nor the earlier panacea of central
planning would appear to carry much conviction today. Societies grow
in historical time characterized by irreversibilities, and history does
not perform controlled experiments for our benefit. Hence the task for
perspective planning remains to minimize avoidable social costs. How¬
ever, the need for flexible adaptable operating mechanisms is very
much there. Above all, there has to be a much greater degree of poli¬
tical consensus on what is attempted. India benefited from this in the
first decade of planning. It is still greatly needed in the remaining years
of this century. No facile conclusion is warranted.
Notes
Notes to Chapter 1
1. See A. O. Hirschman, ‘The Rise and Decline of Development Economics’,

in Essays in Trespassing (Cambridge, 1980).
2. While it is invidious to mention names, it is nevertheless useful to point out
that among those who visited India for extended periods of time during the
fifties were economists with divergent doctrinal positions. However, it is
possibly true to maintain that they were mostly ‘reformists’ of one shade of
another. But liberation economists were not altogether absent, Milton
Friedman and P. T. Bauer being two prominent examples.
3. See A. Lowe, On Economic Knowledge, 2nd revised edn. (New York, 1977).
Lowe’s methodological ideas are not as well known as they deserve to be. To
my mind, both his critique of traditional economics as well as the advocacy
of ‘political economics’ are highly pertinent to recent discussion on eco¬
nomic reform. While much of the substance of current discussion centres
around restoring primacy to the price mechanism, Lowe has critically
examined the postulational basis of ‘supply-demand analysis’ from a
perspective which is generally hidden in the axiomatics of general equili¬
brium analysis. His principal thesis has been that the replacement of the
‘supply-demand’ model is long overdue in an environment where atomistic
postulates, along with extremum principles hold with severe qualifications.
His proposal to replace this traditional approach by ‘political economics’
raises many issues which I cannot even note here. Suffice it to remark that
‘political economics’ forms a useful vantage point from which one can look
at planning as a form of inference.
4. For a recent and relatively succinct presentation, see the Nobel Memorial
Lecture by F. A. Von Hayek, ‘The Pretence of Knowledge’, Scandinavian
Journal of Economics (1975).
5. See P. Masse, ‘The French Planning and Economic Theory’, Econometrica
33 (1965), 265-76, for a defence of planning as a strategy on a decision-
theoretic basis. Masse was associated with the French planning apparatus
for years besides contributing substantially to the literature on investment
planning.
6. See S. Chakravarty, ‘Theory of Development Planning: An Appraisal’, in
Economic Structure and Development: Essays in Honour of Jan Tinbergen, ed. H. C.
Bos, H. 'Linnemann, and P. de Wolff (Amsterdam, 1973).
7. The expression ‘savings constraint’ is interpreted by neo-classical writers as
a limitation on capital formation arising from an unwillingness to defer
current consumption. Emphasis here is put on the deficiency of adequate
92 Notes
foresight. Sometimes it is interpreted as an expression of irrationality on the

part of the consumer, as by Pigou and Ramsey. From a classical point of
view, savings emerge as a constraint because the distribution of incomes is
weighted in favour of classes with low propensities to save. Profits are gene¬
rally assumed to be mostly saved, hence the emphasis on policies in favour of
profit-receivers. This corresponds to the point of view which Arthur Lewis
has taken in the recent literature. In addition, we also have the positions
taken by Keynesians and structuralists. For Keynesians, savings cannot
directly affect the growth process. Their role is an adaptive one—a high pro¬
pensity to save being consistent (in a non-inflationary context) with a high
rate of investment, which is the active variable provided investment is well
directed. For a structuralist, the ‘savings constraint’ implies a disaggregated
view: a reflection of the lopsided nature of the inter-industry matrix. We
shall see in the course of our discussions how that inability to keep these
meanings separate has been responsible for considerable confusion in
framing appropriate action-directives.
8.J. R. Hicks has very rightly emphasized the concept of ‘impulse’ in his
recent writings on the mainsprings of growth. See his essay ‘Industrialism’
in Economic Perspectives. Hick’s idea is basically akin to the Schumpeterian
notion of ‘innovation’ which has been gaining in importance in the context
of the explanation of the ‘Great Recession’ of the 1980s.
Notes to Chapter 2
1. It is interesting to note that R. H. Tawney, a man with strong egalitarian

sympathies, found preoccupation with ‘productivity growth’ the hallmark
of an acquisitive culture. Tawney was of course a non-Marxian socialist.
For a Marxist, ‘productivity growth’ has a justified role in the context of
transition—provided, of course, it does not obliterate the perspective of
transition itself.
2. See A. K. Das Gupta, ‘Recent Tendencies in Economic Theory’, The
Indian Economic Journal 3 (1961), reprinted in Planning and Economic Growth
(London, 1965).
3. See in particular the formulation presented by Nurkse in his famous
Wicksell Lectures ‘Patterns of Trade and Development’, reprinted in a
collection of his papers edited by G. Haberler and R. M. Stern, Equili¬
brium and Growth in the World Economy (Cambridge, Mass., 1961).
4. See A. Young, ‘Increasing Returns and Economic Progress’, Economic
Journal 38 (1928), 527-42. See also N. Kaldor, Further Essays in Economic
Theory (London, 1978). Reference to Verdoorn is included in Kaldor’s
papers.
5. See P. A. Baran, The Political Economy of Growth, ed. R. B. Sutcliffe
(London, 1973), p. 374. Baran was one of several prominent left-wing
economists who visited India at the invitation of P. C. Mahalanobis, as
did others, such as Oskar Lange and Charles Bettleheim. While Baran’s
Notes 93
influence was confined largely to the radical intelligentsia, the more tech¬
nical contributions made by Lange and Bettleheim left a permanent mark
on the Indian economists who worked on the theory of economic planning.
Bettleheim’s work was thematically related to the work done by A. K. Sen
and others on the choice of techniques, while Lange’s impressive lectures
on input-output analysis, preceded by the earlier work of Richard Good¬
win on the empirical side, helped the younger generation of Indian econo¬
mists to orient themselves to the development of economy-wide planning
models.
6. That a growth in demand could elicit extra supplies with the same resource
base in conditions of primitive stagnation was discussed by A. Smith in
connection with his famous discussion of ‘vent for surplus’. H. Myint has
made much of this in his work on the effect of trade on growth. However, it
is doubtful whether this factor constituted a major growth potential for the
Indian economy in the mid-fifties.
7. This was not quite true for a couple of years during the mid-fifties, which
led to an exchange crisis followed by a rephasing of the Second Five-Year
Plan. See D. R. Gadgil on this point in Planning and Economic Policy
(Poona, 1971).
8. ‘Food bottle-neck’ as the main operative constraint on India’s growth was
much emphasized by C. N. Vakil and P. R. Brahmananda in their book
Planning for an Expanding Economy (Bombay, 1956), which was heavily
influenced by the work of R. Nurkse. Nurkse later wrote a review of this
book which is included in his posthumous volume of essays edited by G.
Haberler and R. M. Stern. This essay is worth reading even after the
lapse of nearly thirty years. See R. Nurkse, ‘Reflections on India’s
Development Plan’, in Haberler and Stern (eds.), Equilibrium and Growth
in the World Economy.
9. SeeP. C. Mahalanobis, ‘Operational Research Models used for Planning
in India’, in Papers on Planning, ed. P. K. Bose and M. Mukherjee
(Calcutta,. 1985), p. 257. This paper was first published in 1960.
10. See J. Bhagwati and S. Chakravarty, ‘Contribution to Indian Economic
Analysis’, American Economic Review, Supplement, 5 (1969), 1-73. See also
S. Chakravarty, Capital and Development Planning (Cambridge, Mass.,
1969).
11. It is a reasonable conjecture that the compulsions of building up a post¬
colonial state based on consensus led Nehru to compromise to a much
greater extent with rural vested interest than was necessary. This is, how¬
ever, an issue which only historians will be able to judge with authority.
12. See W. A. Lewis, ‘Economic Development with Unlimited Supplies of
Labour’, Manchester School 22 (1954), 131-91.
13. See M. Kalecki, Essays on Developing Economies (London, 1976).
14. See Second Five-Year Plan, 1956, p. 99.
15. See G. D. A. McDougall, ‘India’s Balance of Payments’, in Pricing and
Fiscal Policies, ed. P. N. Rossenstein-Rodan (London, 1964).
16. See A. K. Sen, Choice of Techniques (Oxford, 1960), app. B.
94 Notes
17. R. Komiya, who developed a simple maximizing version of the

Mahalanobis model in its four-sector variant, found the optimal solution
to be quite different from what Mahalanobis had deduced on the basis of
his ‘fixed targets’ model. Obviously, the Mahalanobis solution was an
inefficient one in terms of the assumed set of parameter values. But it
would be simplistic to dismiss the Mahalanobis solution on this account, as
Komiya’s solution would have implied zero investment in one of the
sectors, which was politically unacceptable. See R. Komiya, ‘A Note on
Professor Mahalanobis’ Model of Indian Economic Planning’, Review of
Economics and Statistics 41 (1959), 29-35.
18. I believe that it is possible to maintain that the full implications of the ‘dual
development thesis’ were not fully grasped by Mahalanobis himself. His
own numerical analysis was extremely weak. G. Mathur in his book,
Planning for a Steady Growth (Oxford, 1965), did develop the thesis at greater
length and brought out its rationale. His analysis was, however, abstract
and did not take into account the class distinction of incomes and assets.
19. SeeJ. R. Hicks, Capital and Time (Oxford, 1973). See also J. R. Hicks,
Economic Perspectives (Oxford, 1977).
20. See A. Lowe, ‘Structural Analysis of Real Capital Formation’, in Capital
Formation and Economic Growth (Princeton, 1955), 581-634. See also his
more extensive treatment in The Path of Economic Growth (Cambridge,
1976).
Notes to Chapter 3
1. Third Five- Year Plan (1961), 39.

2. The expression ‘bargain sector’ was explicitly used by Dr S. R. Sen in his
presidential address before the All-India Agricultural Economics Confer¬
ence in Baroda in December 1959. Sen, who was at that time working in
the Planning Commission as adviser on agricultural problems, explained
further:
Until the entire field of agriculture in such a society [he was referring
to the Indian case] is saturated with the application of such known
techniques, the development of agriculture can provide as it were a
bargain sector [italics in the original], a sector with large unexploited
potential which can provide the requisite surplus with relatively low
investment and in a comparatively short time after, of course, a
certain minimum infrastructure has been developed.
The address was reprinted in S. R. Sen, The Strategy for Agricultural Develop¬
ment, 2nd edn. (London, 1966), 3-4. Sen’s perception was evidently
shared by Mahalanobis, whose four-sector model used a very low capital-
output ratio for agriculture, the justification for which was not so explicitly
stated by Mahalanobis himself.
3. We have seen that the Third Five-Year Plan document was eloquent in its
advocacy for agriculture. This is not, however, equally evident from the
Notes 95
investment-allocation ratios worked out by the planners. Thus, whereas in

the Second Plan the outlay on agriculture was originally envisaged as
11.3% of the total, in the Third Plan the proportion was increased to 14%.
4. The ‘product wage’ is the more relevant variable here as it involves
deflation of money wages by the price index of industrial products and is
thus more clearly linked with profitability.
5. Historical support for the above thesis was ardently sought. It was almost
elevated to a ‘natural law’ of growth. Some found support for it in the
Russian experience, as we have noted, but there were others who found
Japanese development more relevant to the Indian experience. What was
not adequately appreciated at this time was that India had recorded an
annual average population growth rate of 2.4 % over the decade 1951-61,
which exceeded the Japanese pre-take-off growth rate by more than a
factor of two. This, along with the pre-existing density of population, was
enough to create a historically unique configuration which made the
wholesale application of a ‘classical strategy’ inapplicable. Subsequent
historical research has further questioned the factual basis of some of the
more facile formulations.
6. See S. R. Sen, ‘Impact and Implications of Foreign Surplus Disposal on
Underdeveloped Economies’, address delivered at the Fiftieth Anniver¬
sary Session of the American Farm Economics Conference, Ames, USA,
published in S. R. Sen, The Strategy for Agricultural Development (Bombay
1962).
7. Food grains production fell from an all-time peak of 89 million tonnes in
1964/5 to 65 million tonnes in 1965/6, and did not significantly increase
above this level even in 1966/7.
8. Acceleration principle operating in the reverse direction is a typical feature
of a cyclical downswing. In the Indian case, the downswing was triggered
off by adverse weather. For an explanation of the process, seej. R. Hicks,
A Contribution to the Theory of the Trade Cycle (Oxford, 1950).
9. See D. Narain, ‘Growth of Productivity in Indian Agriculture’, Indian
Journal of Agricultural Economics (1977), 1-44. Narain’s study was a very
carefully conducted decomposition exercise. It covered the period from
1952/3 to 1972/3. His aim was to breakdown sources of productivity
growth into three factors: a pure yield effect, a locational effect, and an
effect based on changes in the cropping pattern. His Table II shows that
the productivity growth in the period 1952/3 to 1962/3 was of a relatively
low-cost variety, being the product of changes in cropping pattern induced
by public irrigation and better inter-regional specialization, whereas in the
period 1962/3 to 1972/3 it reflected much more the effect of intensified use
of modern inputs, reflecting in turn substantial capital investment,
directly and indirectly.

10. Kalecki’s paper is now widely available in his posthumous collection of
papers edited by Joan Robinson, Essays on Development Economics (London,
1976).
11. D R. Gadgil was one of the foremost critics of the Indian planning process
96 Notes
in the 1950s. Gadgil was not opposed to the need for industrialization as
such, but he strongly criticized what he considered to be the undue centra¬
lizing tendencies of Indian planning. By training an economic historian
and by practice also an activist in the co-operative movement in Maha¬
rashtra, Gadgil strongly emphasized institutional dimensions which were
not adequately stressed by Mahalanobis and his colleagues. Incidently,
Gadgil was one of the experts who served on the first UN committee which
recommended a package of measures for the economic development of
underdeveloped countries.
12. A. S. Manne and A. Rudra argued in their widely acknowledged paper,
‘A Consistency Model for Indian Planning’, Sankhya, series B, 27 (1965),
57-144, that in India, industrial growth had a largely autonomous charac¬
ter as flows between industry and agriculture were not sufficiently strong.
13. See A. K. Sen, Choice of Techniques (Oxford, 1960), app. A; also Joan
Robinson’s valuable discussion of‘Land and Accumulation’, in her book
The Accumulation of Capital (London, 1956), 321-4.
14. In a recent ILO study, Poverty in Rural Asia, we read that while the Green
Revolution may have affected production levels favourably in several
cases, only in the Punjab and Thailand is there evidence of a reduction in
poverty in the 1970s, and even there, the reduction was not particularly
notable. See A. R. Kahn and E. Lee (eds.), Poverty in Rural Asia (Bangkok,
1984).
15. See S. Chakravarty and A. S. Manne, ‘Optimal Growth When the
Instantaneous Utility Function Depends on the Rate of Change in Con¬
sumption’, American Economic Review 58 (1968), 1951-4.
16. Nurkse had talked about the savings potential contained in ‘disguised
unemployment’, an adaptation of J. Robinson’s earlier work which was
initially proposed to explain a partial shift of the labour force from regular
work to casual employment in the context of the downswing of an econo¬
mic cycle. While Nurkse used the same term (i.e. disguised unemploy¬
ment) in his theoretical analysis, he used it in discussing the possibility that
the ‘structural labour reserve’ in overpopulated agriculture could be
redeployed without significant additional investment. Richard Kahn
developed the idea at greater length in his important but somewhat
neglected paper ‘The Pace of Development’. SeeJ. Robinson, ‘Disguised
Unemployment’, Economic Journal (1936), reprinted in Collected Papers,
vol. iv (Oxford, 1973); R. Nurkse, Problems of Capital Formation in Under¬
developed Countries (London, 1953); R. F. Kahn, Essays in the Theory of
Growth (Cambridge, 1972).
17. See G. Myrdal, Asian Drama (London, 1968).
18. In fact, the Third Five-Year Plan itself suggests uneasiness on this score
(p. 18) and talks about setting up a committee to look into this issue.
19. Report of the Committee on the Minimum Level of Living (1962),
reprinted in abridged form in P. K. Bardhan and T. N. Srinivasan (eds.)
Poverty and Income Distribution (Calcutta, 1974).
20. For a detailed discussion of the mathematical structure of the model as well
Notes 97
as for the type of data used, see the ‘Technical Note’ to the Fifth Five-Year
Plan Approach Paper which was released by the Planning Commission in
1973. See ‘Technical Note on the Approach to the Fifth Five-Year Plan of
India’, Perspective Planning Division, Planning Commission (New
Delhi, 1973). This note is the first of its kind issued by the Indian Planning
Commission, where an explicit inter-industry model was integrated with a
macro-economic model to deduce a profile of internally consistent sectoral
growth rates for the terminal year of the plan.
21. The ‘open loop’ character of the model was the subject of an extensive
critique by S. D. Tendulkar. See his contribution in Bardhan and Srini-
vasan (eds)., Poverty and Income Distribution.
Notes to Chapter 4
1. See Isher Judge Ahluwalia, Industrial Growth in India Since the Mid-sixties
(Oxford and Delhi, 1985). This is one of the more comprehensive studies
on India’s industrial performance, although doubts can be raised on
several matters of interpretation.
2. The organized manufacturing sector covers all manufacturing and pro¬
cessing establishments classified as factories and registered under the
Indian Factories Act, 1948. The ‘unorganized sector’ covers all other
establishments. Statistics are much more reliable for the organized sector.
3. This point is connected with the general issue highlighted by M. Olson in
his valuable work, The Logic of Collective Action (Cambridge, Mass., 1975).
It is possible to use some of his insights to throw light on how the objectives
of the plan have been frustrated in practice by a coalition of different
interest groups who have in recent years become much better organized to
protect their ‘sectoral interests’, be it in agriculture or industry.
4. See Lowe, ‘Postscript’, in On Economic Knowledge.
5. See P. K. Bardhan, The Political Economy of Development in India (Oxford,
1984). See also my review of his book in Journal of Peasant Studies 13 (1985),
134-6.
6. See F. List, The National System of Political Economy, first published in
German in 1841; English version published in London, 1928.
7. See A. O. Krueger, ‘The Political Economy of Rent Seeking Activities’,
American Economic Review 64 (1974), 291-303.
8. S. Ishikawa in his recent analysis of Chinese economic reform has come to
a similar conclusion. His criticism of the ‘market adjustment process’ as a
substitute for what he calls the ‘State economy’ are not that much apart
from the reasons I have indicated, although his analysis runs in lines of
Hicks’s distinction between a ‘customary economy’, ‘state economy’, and
‘market economy’. See S. Ishikawa, ‘Socialist Economy and the Expe¬
rience of China—A Perspective on Economic Reform’, A. Eckstein
Memorial Lecture, 18 Mar. 1985, University of Michigan, Ann Arbor,
(mimeo).
98 Notes
9. See especially A. O. Hirschman, The Strategy of Economic Development, (New

Haven, Conn., 1959). The same set of issues has been very prominently
stressed by G. Myrdal and F. Perroux in numerous writings.
10. This can give rise to a form of‘unequal exchange’ and a resulting transfer
of resources from ‘poorer’ to richer parts of the country.
11. The Panchayati Raj is a system of local self-government at the village, block
(group of villages), and district levels. The Panchayati Raj institutions
exhibit considerable variation across the country but have a three-tier
structure: Zilla Paishads at the district level, Panchayat Samitis at the block
level, and Village Panchayats at the village level.
Notes to Chapter 5
1. Se V. K. R. V. Rao, India’s National Income, 1950-80: An Analysis of

Economic Growth and Change (Delhi, 1983), 161.
2. See Report of the Working Group on Savings (Reserve Bank of India
Feb. 1982), 44.
3. Ibid., p. 133.
4. See K. N. Raj, ‘Some Observations on Economic Growth in India Over
the Period 1952/53 to 1982/83’, Economic and Political Weekly 19 (13 Oct
1984), 1801-4.
5. In the context of formulating an appropriate energy policy for India,
the distinction between ‘commercial’ and ‘non-commercial’ sources of
energy is a very important one. ‘Commercial energy’ refers to all forms of
energy for which there is a well-organized market. ‘Non-commercial
energy’ refers to energy derived from vegetable wastes, forest resources,
and domestic sources. As a percentage of total energy consumed, non¬
commercial energy is declining but still very important, as will be clear
from Table 18.
6. Faulty design as well as tardy implementation can also explain why

capital-output ratios in sectors such as irrigation and power have exceeded
the planned figures. See Table 11.
7. B. Goldar, in a recent study dealing with productivity trends in Indian
manufacturing industry over the period 1951-78, finds that total factor
productivity growth has been sluggish (somewhat less than 2 % per annum
on a trend basis). However, he finds no evidence of a structural change in
this regard between the period 1951-64, on the one hand, and 1965-78,
on the other, even though the rate of growth of industrial production
was higher during the earlier period. Goldar also finds no evidence of
increasing returns to scale in the manufacturing sector. See B. Goldar,
‘Productivity Trends in Indian Manufacturing Industry, 1951-78’ Indian
Economic Review 18 (1983), 73-85.
8. As an example, we can take the case of the irrigation sector. In 1980, 172
major and 452 medium irrigation projects were under execution. Out of
172 major on-going projects, 82 had been started before 1976, of which it
Notes 99
was expected that 65 would be completed by the end of the Sixth Plan. This
shows clearly that the taking up of a large number of projects to satisfy the
demands of different states resulted in the spreading of available resources
somewhat thinly. As a consequence, delay in the completion of on-going
projects had an adverse impact on the growth rate. For more details see
Organizational Set-up, Functions, Achievements, and Future Programmes (Minis¬
try of Irrigation, New Delhi, 1981).
9. Certain recent studies carried out by the Planning Commission and other
agencies, including research institutions, suggest that agricultural tran¬
sition is currently going on in the Eastern Region of the country especially
Eastern Uttar Pradesh. Thus, Professor Kusum Chopra in her recent
study has found that during the period 1970-80, the agricultural output in
Eastern U. P. increased at a rate greater than 3% per annum. Eastern
U P. has traditionally been a backward area, even though well endowed
with water. However, much of this increase is due to an increase in wheat
production, for which appropriate water management is easier to achieve.
While a combined package of irrigation, fertilizer, and credit can help sub¬
stantially in raising yield levels for the region as a whole, as may have
happened in Eastern U. P. varietal improvements allowing the crop to
mature before floods occur or to survive the average span of floods will
prove useful, as will consolidation of holdings, security of tenancy, and
better organization of small farmers. See K. Chopra, ‘An Analysis of
Agricultural Transition in Eastern Region of India, 1970/71 to 1980/81’,
paper presented at the Conference on Planning at Jawaharlal Nehru
University, December 6-8, 1985. Her conclusions in this respect are fully
compatible with the findings in the Report of the Study Group on Agricultural
Strategies for the Eastern Region of India (Planning Commission, New Delhi,
1985).
10. The model presented by A. Bhaduri of incompatibility between semi¬
feudalism based on usurious exploitation and introduction of techno¬
logical change has attracted considerable attention in the literature. While
the role of usury cannot be denied as a part of the way of life of land-owning
gentry in these areas, it is doubtful that the latter are likely to shy away
from profit-making investment opportunities once the infrastructural
support base is created. I am at this stage not interested in entering into a
discussion of the highly stylized character of the Bhaduri model. See A.
Bhaduri, ‘A Study in Agricultural Backwardness under Semi-Feudalism’
Economic Journal (1973) 83. See also S. Chakravarty, ‘Power Structure and
Agricultural Productivity’, in M. Desai, S. H. Rudolph, and A. Rudra
(eds.), Agrarian Power and Agricultural Productivity in South Asia (New Delhi,
1984), 345-73.
11. For reviews, see M. Dobb in Co-existence 7:1 (1969), 63-6; P. Mattick,
‘Gunnar Myrdal’s Dilemma’, Science and Society 32:4(1968), 421-40; and
P. C. Mahalanobis, ‘The Asian Drama: An Indian View’, Sankhya, series
B(1969), 435-58.
12. See Rao, India’s National Income, 1950-80, 37. Rao’s analysis uses the
100 Notes
three-fold classification of primary, secondary, and tertiary sectors, but

his findings are consistent with the statement in the text.
13. See N. Kaldor, Strategic Factors in Economic Development (New York, 1967),
55-6.
14. Ibid., p. 56.
15. See Mahalanobis, ‘The Asian Drama: An Indian View’, 435-58.
16. See S. Chakravarty, ‘Reflections on the Growth Process in the Indian
Economy’, Administrative Staff College, Hyderabad, 1974, reprinted in
C. D. Wadhawa (ed.) Some Problems of India’s Economic Policy (Bombay,
1977).
17. The number of foreign collaboration agreements in force was only 262 in
1978, a figure which increased to 384 in 1981, 590 in 1982, 673 in 1983,
and more than 700 in 1984.
18. See N. Rosenberg, ‘Capital Goods, Technology and Economic Growth’,
Oxford Economic Papers 15 (1963). Reprinted in his Perspectives on Technology
(Cambridge, 1976) 148.
19. See M. R. Bhagvan ‘Capital Goods Sector in India’, Economic and Political
Weekly 20 (9 Mar. 1985).
20. The logic of this position has been carefully stated by J. Bhagwati and P.
Desai in their well-known OECD volume India: Planning]or Industrialization
(Oxford, 1970).
21. See T. Blumenthal and Chung H. Lee, ‘Development Strategies of Japan
and the Republic of Korea: A Comparative Study’, The Developing Econo¬
mies 23 (1985), 221-35.
22. See Gary Fields, ‘Employment, Income Distribution and Economic
Growth in Seven Small Open Economies’, Economic Journal 94 (1984),
74-83. Professor Bhagwati has questioned the analysis by Fields in his
recent essay, ‘Export Promotion as a Development Strategy’, in Economic
Policy and Development, ed. T. Shishido and R. Sato (London, 1985), 59-68.
I believe, however, that this is not merely a question of relative wage differ¬
entials in exportables as against other sectors, but a much broader issue of
political economy where the nature of bargaining process between capital
and labour is at issue.
23. See also I. Adelman, ‘Beyond Export-led Growth: A Symposium on
Reassessing Development Experience’, World Development 12 (1984),
937-49, and comments by Hans W. Singer and T. Scitovsky (pp. 950-4).
24. As an illustration of this point, it is instructive to take the case of‘machine
tool’ industry, a key sector in the Indian context. In this sector, while
domestic production met 86% of total requirements in 1978, the corres¬
ponding figure came down to 62% in 1984 as a result of import liberali¬
zation. What is more interesting, the fiscal policy seems to be also biased
against greater domestic production of more recent types of machine
tools, particularly the more modern computer numerically controlled
machine tools, CNC in brief. Thus, if a CNC machine tool is imported,
the duty levied is only 45% whereas ‘if components of similar or even
the same machines are imported, one has to pay a duty at 85 per cent in
Notes 101
addition to the excise duty and sales tax. All this actually adds up to over
100 per cent of the value of the indigenously assembled machine as
compared to only 45 to 50 per cent on a completely imported machine tool
of equivalent type.’ See S. M. Patil, ‘Machine Tool Industry’, Economic
Times (9 Jan. 1986), p. 5. No wonder the author of the article, who was for
many years chairman and managing director of Hindustan Machine
Tool, the premier organization in the country, felt baffled by the policy as
he could discern no rationale behind it.
25. There is insufficient evidence as to the direction of causation between
exports and economic growth. It has been the common practice to inter¬
pret high correlation between exports and economic growth as evidence of
causation running from exports to growth. A recent study using Granger
tests casts considerable doubt on the direction of causality. See W. S. Jung
and P. J. Marshall, ‘Exports, Growth and Causality in Developing
Countries’, Journal of Development Economics 18:1 (1985), 1-12. The
relationship is obviously much more complex than what export promotion
enthusiasts believe to be the case.
26. Recent indications on the balance of payments front would appear to
support the cautious view adopted here. Exports are unlikely to show any
increase even in value terms over the fiscal year 1985/6, whereas imports
have shown a steep increase. While the so-called ‘bulk imports’ have
shown a very sharp rise, imports such as capital goods have also shown a
considerable rise. The effect of the set of policies generally labelled as ‘out¬
ward looking’ has thus far shown little to add to industrial dynamism. The
present trend may reverse itself, but it is rather unlikely on the present
reckoning unless the reduction in bulk imports can be carried out along the
lines indicated in the text.
27. This point has also been stressed by Kaldor in his more recent contri¬
butions. See N. Kaldor, Further Essays in Economic Theory (London, 1978).
28. SeeJ. Krishnamurty, ‘Changes in the Indian Work Force’, Economic and
Political Weekly 19 (1984), 2121-8.
29. A recent report on the functioning of the monetary system in India
released by the Reserve Bank of India shows quite conclusively that Indian
public debt is highly monetized. The entire management of the public debt
in India needs a through review from the point of view of minimizing its
impact on the growth of money supply, an issue which, is covered in some
detail in the above report. See RBI, Report of the Committee to Review
the Working of the Monetary System (Bombay, April 1985).
30. See J. A. Schumpeter, ‘The Crisis of the Tax State’, in International
Economic Papers, no. 4 (London, 1954).
31. Recent policy changes introduced in the Finance Bill, 1986, envisage a
modified value added tax to get over some of the cascading problems.
32. The corresponding figure for the Sixth Five-Year Plan even on a realized
basis was Rs. 18,930 million.
33. See Bardhan, The Political Economy of Development in India.
34. Statistics show the large growth of net financial savings on the part of
102 Notes
the household sector which are held in the form of currency, time deposits,
and certain forms of contractual savings. This has reflected not merely the
growing monetization of the Indian economy, but also a greater degree of
overall financial deepening. The point is discussed at length in the Report
of the Committee to Review the Working of the Monetary System
(Reserve Bank of India, Bombay, 1985).
Notes to Chapter 6
1. However, indicators such as life expectancy and literacy show more signi¬
ficant growth rates, although not satisfactory enough in terms of what I
would consider desirable as well as feasible.
2. For a comparative analysis of the data captured by the census of 1981 and
recent National Sample Surveys, seej. Krishnamurty, ‘Changes in the
Indian Work Force’ Economic and Political Weekly 19 (15 Dec. 1984), 2121-8.
3. These questions raise a whole complex of issues connected with the question
of ‘property rights’ in land. Do we view ‘property rights’ as an indivisible
variable which is restricted to assuming only two values, zero and unity; or
do we treat it as a ‘bundle of rights’ implying some divisibility? Implications
of this question in connection with fashioning ‘rural public works’ have been
discussed in my paper, ‘Mahalanobis and Contemporary Issues in Develop¬
ment Planning’, Sankhya, series C, 37 (1975) pt. 2, 1-11.
4. On the question of technological modernization which ‘opening up the
economy’ is supposed to facilitate, a well-known Japanese scholar has
emphasized very strongly the role of ‘social absorption capacity’ in
explaining Japan’s technological progress. This is a Veblenian perspective,
much neglected in contemporary literature on models of development. See
R. Minami, ‘Industrialisation and Technological Progress in Japan’, Asian
Development Review 2:2 (1984) 69-79.
5. In a recent paper, C. H. Hanumantha Rao, until recently a member of the
Planning Commission in charge of perspective planning, has forcefully
highlighted the role of direct programmes aimed at alleviating poverty. See
C. H. Hanumantha Rao, S. P. Gupta, and K. L. Dutta, ‘Poverty Eradi¬
cation in India by the Year 2000: Some Macroeconomic Implications’, Man
and Development 7 (1985), 29-37.
6. In fact, the postulated value for the marginal propensity to save for the
Seventh Five-Year Plan is 28.4% which, in effect, will require a reversal of
the trend noticed during the recent past. For further details, see Table 1.
Statistical Appendix
Table 1 Estimates of the Marginal Rate of Saving in the Indian

Economy, 1950-85
Period Marginal rate of

gross saving (%)
1950/51-1960/61 20.0
1961/62-1969/70 18.2
1970/71-1979/80 26.3
1980/81-1984/85 21.4
Source: Estimates are based on data available in the various issues of National Accounts
Statistics, Central Statistical Organization, Department of Statistics, Ministry of Plan¬
ning, New Delhi.
104 Statistical Appendix
Table 2 Rate of Gross Saving in the Indian Economy, 1951-84
Year Rate of gross

domestic saving
1951/52 9.5
1952/53 9.0
1953/54 9.3
1954/55 11.2
1955/56 12.8
1956/57 12.9
1957/58 11.8
1958/59 11.5
1959/60 12.3
1960/61 13.1
1961/62 13.8
1962/63 14.0
1963/64 14.2
1964/65 14.6
1965/66 15.2
1966/67 15.3
1967/68 14.8
1968/69 14.8
1969/70 15.8
1970/71 16.8
1971/72 16.8
1972/73 17.7
1973/74 18.0
1974/75 19.3
1975/76 20.3
1976/77 21.6
1977/78 23.1
1978/79 23.2
1979/80 23.4
1980/81 22.6
1981/82 22.5
1982/83 22.3
1983/84 22.3
Source: Estimates are based on the data available in National Accounts Statistics, (Jan.
1985), CSO, New Delhi; and ‘Quick Estimates of National Income, Consumption Expenditure,
Saving and Capital Formation, 1984/85 (Jan. 1986), CSO, New Delhi.
Note: The rate of saving is calculated as a percentage of gross domestic product at market
prices and has been calculated on a three-year moving-average basis.
Table 3 Estimates of Incremental Capital-Output Ratios in the

Indian Economy, 1951-84
Period Gross ratio Net ratio
1951/52-1955/56 2.87 1.97

1956/57-1960/61 4.05 3.16
1961/62-1965/66 4.58 3.61
1966/67-1968/69 5.05 3.96
1969/70-1973/74 5.86 4.30
1974/75-1978/79 4.28 3.24
1980/81-1983/84 4.45 3.38
1951/52-1959/60 3.49 2.59

1960/61-1969/70 4.40 3.39
1970/71-1979/80 5.40 4.11
1980/81-1983/84 4.45 3.38
Source: Estimates are based on the data available in the various issues-of National Accounts
Statistics, CSO, New Delhi.
Note: Estimates are at 1970/71 prices and were made using three-year moving-average
estimates of GDP and NDP at market prices for the gross and net ratios respectively,
except for the years 1950/51 and 1983/84 for which point estimates have been used. A
one-year time lag has been assumed between investment and output.
Table 4 Estimates of Sectoral Incremental Capital-Output Ratios

in the Indian Economy, 1951-84
Sector 1951/52 1960/61 1970/71 1980/81
to to to to
1959/60 1969/70 1979/80 1983/84
Agriculture
(crops and livestock) .2.18 3.23 4.22 3.17
Mining 2.59 5.62 14.56 9.98
Manufacturing 4.47 6.49 8.20 14.36
Other sectors 5.85 5.31 5.79 4.43
3,93 5.93 5.97 .5.16

All sectors
Source: Estimates are based on the data available in the various issues of National Accounts
Note: Estimates are at 1970/71 prices and were made using three-year moving-average
estimates of sectoral GDP at factor cost. A one-year time lag has been assumed between
investment and output for all sectors. The sectoral and aggregate GDP estimates for
1983/84 are point estimates.
Table 5 Sectoral Rates of Growth of Gross Domestic Product in

the Indian Economy, 1950/51 to 1983/84 {per cent per
annum)
Sector 1950/51 1960/61 1970/71 1980/81 1970/71
to to to to to
1959/60 1969/70 1979/80 1983/84 1983/84
Agriculture
(crops and livestock) 2.61 1.37 2.31 3.96 2.27
Mining 4.81 5.24 4.33 10.53 5.14
Manufacturing 6.11 4.77 4.75 3.25 4.21
All sectors 3.63 3.24 3.76 4.98 3.81
Note: Estimates are trend growth rates based on semi-log functions; three-year moving-
average estimates of GDP have been used for estimating the growth rates. The data for
1983/84 are point estimates, taken from ‘Quick Estimates of National Income’ (Jan.
1986), CSO, New Delhi.
Table 6 Sectoral Contribution to Aggregate Growth in the Indian

Economy, 1950/51 to 1983/84 {per cent)
Sector 1950/51 1960/61 1970/71 1980/81 1970/71

to to to to to
1959/60 1969/70 1979/80 1983/84 1983/84
Agriculture
(crops and
livestock) 54.5 48.1 41.0 39.2 39.6
Mining 0.8 1.0 1.1 1.3 1.2
Manufacturing 11.4 13.8 15.4 15.0 14.8
Other sectors 33.3 37.1 42.5 44.5 44.4
All sectors 100.0 100.0 100.0 100.0 100.0
Note: Sectoral contribution to aggregate growth for each period has been computed by
using the average share of sectoral GDP to total between the base year and terminal year
as weights and applying trend growth rates of sectoral GDP at each period.
Table 7 Sectoral Shares in Total Investment in the Indian

Economy, 1951-84 (per cent)
Sector 1950/51 1960/61 1970/71 1980/81

to to to to
1959/60 1969/70 1979/80 1983/84
Agriculture
(crops and livestock) 22.1 16.4 17.9 16.6
Mining 0.8 1.8 3.0 5.2
Manufacturing 20.4 26.2 26.7 26.0
Other sectors 56.7 55.6 52.4 52.2
Total 100.0 100.0 100.0 100.0
Note: Estimates represent the average share of sectoral investment to total investment
for each period, measured at 1970/71 prices.
Table 8 Trend Growth Rates of Investment in the Indian

Economy, 1950/51 to 1983/84 (per cent per annum)
Sector 1950/51 1960/61 1970/71

to to to
1959/60 1969/70 1982/83
Total investment 7.42 4.94 4.94°

Public sector investment 14.20 3.42 6.87“
Private sector investment — 5.99 3.39“
SECTORAL INVESTMENT
Agriculture
Total 2.89 5.81 4.68
Public sector — 4.44 6.48
Private sector — 6.38 3.95
Mining - 1.09 4.56 17.20
Manufacturing
Total 11.41 5.14 4.83
Electricity 16.96 7.71 8.65
Railways 15.93 -5.06 3.88
Communications 3.18 9.57 8.55
Other transport
Total 10.10 3.76 3.01
Note: Computations are based on the data on gross domestic capital formation at
1970/71 prices available in National Accounts Statistics CSO, New Delhi.
al 970/71 to 1983/84.
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Table 10 Rates of Growth of Price Deflators in the Indian

Economy, 1951-84 {per cent per annum)
GDP deflator
Period Wholesale Investment
price (market (factor deflator
index prices) cost)
1950/51-1959/60 0.64 0.43 0.37 2.86
1960/61-1969/70 7.41 7.54 7.47 6.30
1970/71-1979/80 8.85 7.78 8.12 9.69
1970/71-1983/84 9.10 8.21 8.46 10.36
Source: Based on the data available in various issues of National Accounts Statistics, CSO,
New Delhi; and Revised Index Numbers of Wholesale Prices in India, Monthly Bulletin for March
1985, Office of the Economic Adviser, Ministry of Industry and Company Affairs, New
Delhi.
Note: Estimates are trend growth rates based on semi-log functions.
Table 11 Irrigation Potential and Utilization in Large- and

Medium-scale Irrigation Projects, 1950-85
Year Potential irrigated area Area utilized Ratio of utilization

(million ha.) (million ha.) to potential (%)
1950/51 9.7 9.7 100

1960/61 14.3 13.1 92
1968/69 18.1 17.0 94
1979/80 26.6 22.6 85
1984/85 30.5 25.3 83
Source: Sixth Five-Year Plan (1980-85) and Seventh Five-Year Plan (1985-90), Planning
Commission, New Delhi.
Note: The decline in the percentage of utilization to potential observed during the 1970s
and up to 1984/85 partly explains the rise in the incremental capital-output ratio.
Table 12 Rates of Growth in Electricity Capacity and Generation

in India, 1950-85 {per cent per annum)
Period Capacity Generation
1950/51-1959/60 8.31 11.34

1960/61-1969/70 12.64 12.07
1970/71-1979-80 7.83 7.33
1980/81-1984/85 9.36 8.74
1970/71-1984/85 8.19 7.34
Source: Estimates are based on the data in the various issues of Basic Statistics Relating to the
Indian Economy, CSO, New Delhi; and various issues of Economic Survey, Ministry of
Finance, New Delhi.
Note: Estimates are trend growth rates based on semi-log functions.
Table 13 Rates of Growth in Indian Manufacturing, 1951/52 to

1982/83 {per cent)
Industry group 1951/52 1960/61 1970/71

to to to
1959/60 1969/70 1982/83
1. Food products 5.61 3.23 4.83

2. Beverages and tobacco 7.29 5.05 2.68
3. Textiles 2.98 0.70 5.36
4. Leather products 4.11 -2.38 0.74
5. Wood products 14.09 8.29 -0.71
6. Paper products 7.86 6.58 2.86
7. Rubber, petroleum, and
plastic products 17.54 10.40 3.82 ■
8. Chemical products 7.90 8.39 5.76
9. Non-metallic mineral
products 11.55 6.02 3.36
10. Basic metals and alloys 6.52 7.01 5.46
11. Metal products 8.50 0.74 3.25
12. Non-electrical machinery 21.02 17.01 6.09
13. Electrical machinery 17.64 14.01 6.17
14. Transport equipment 14.83 7.66 3.34
15. Miscellaneous manufacturing 7.12 10.49 1.82
Note: Estimates are trend growth rates based on semi-log functions and relate to the
factory sector of Indian manufacturing.
Table 14 Trend Growth Rates in Agricultural Production in

India, 1950/51 to 1983/84 {per cent per annum)
1950/51 1960/61 1970/71

to to to
1959/60 1969/70 1983/84
All commodities 3.64 1.68 2.62

Food grains 3.68 1.71 2.68
Non-foodgrains 3.57 1.59 2.50
Principal non-
foodgrain crops
Oilseeds 3.75 0.93 1.31

Fibres 3.93 -0.24 2.09
Sugarcane 4.02 1.69 3.12
Weighted index 3.86 0.98 2.04
Source: Based on the index of agricultural production (base: triennium ending 1968/69
= 100) available in Estimates ofArea and Production of Principal Crops in India, Directorate of
Economics and Statistics, Ministry of Agriculture, New Delhi.
Notes: Estimates are trend growth rates based on semi-log functions. The weighted
trend growth rate for the three main non-foodgrain crops has been obtained on the basis
of their weights in the index of agricultural production.
Table 15 Labour, Land, Capital, and Output in Indian

Agriculture, 1950/51 to 1979/80
Element 1950/51 1960/61 1970/71 1979/80
Agricultural workers, in 101.92 137.80 167.33 192.69

millions (3.06) (1.96) (1.58)
Net area sown, in millions 118.75 133.20 140.78 141.00
of hectares (1.15) (0.56) —
Capital stock—net, in 128,990 150,180 209,990 311,770
millions of rupees (1.53) (3.41) (4.49)
Gross domestic product in 103,880 136,200 169,530 197,560
agriculture, in millions of (2.75) (2.21) (1.71)
rupees
Land per worker, in hectares 1.17 0.97 0.84 0.73
GDP per hectare, in rupees 875 1,023 1,204 1,401
(1.57) . (1.64) (1.70)
Capital stock per hectare, 1,086 1,127 1,492 2,211
in rupees (0.31) (2.85) (4.47)
GDP per worker, in rupees 1,019 988 1,013 1,025
Capital stock per worker,
in rupees 1,266 1,090 1,255 1,618
Source: S. N. Raghavan, Report on Impact of Agricultural Investment Food and Agriculture

Organization, Rome, 1984.
Note: Figures in parentheses represent average annual rate of growth over the previous
period. Figures for rupees calculated at 1970/71 prices.
Table 16 Relationship between Public and Private Investment in

Indian Agriculture, 1960/61 to 1982/83
Estimated equation and period a, #2 & DW
Log(AGPRIV), = a, + a2 log(AGPUIV)
1960/61 to 1969/70 - 1.1854 1.371466 0.879 1.94
(8.164)
1970/71 to 1982/83 2.8283 0.680071 0.773 2.43
(6.476)
Log(AGPRIV), + , = ax + a2 log(AGPUIV),
1960/61 to 1969/70 - 1.0785 1.360682 0.783 2.50
(5.459)
1970/71 to 1982/83 3.2210 0.620240 0.659 2.21
(4.720)
Notes:
1. AGPRIV = Private investment in agriculture.
AGPUIV = Public investment in agriculture.
2. The equations have been estimated using the data on gross domestic capital forma¬
tion at 1970/71 prices available in National Accounts Statistics (CSO). The distri¬
bution between public and private investment for the 1950s is not available.
3. Agriculture represents crop and livestock sectors.
4. Figures in parentheses represent t values. The coefficients are all significant at
0.5%.
inputs
Total
o o o o o o
o o o o o o
Share of Modern Inputs in Total Inputs in Indian Agriculture, 1950/51 to 1982/83 {per cent) o o o o o o
Traditional
inputs
<y> co t-, oo i-i oi

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Ol Ol CO N is o
Total
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Table 17
I I I I I I
' CO < CO ’—i H D.
Oh
Period
iO CO CO b. N CO
O O to O to o
lO CO CD N N CO
05 05 05 05 05 05
3 ^
Table 18 Growth of Modern Inputs in Indian Agriculture,

1970/71 and 1981/82
1970/71 1981/82
1. Current inputs (Rs. million)

Traditional inputs 34,194 99,778
Modern inputs 6,692 67,414
Total inputs 40,886 167,192
2. Agricultural output
(Rs. million) 207,295 607,447
3. Ratio of total inputs
to output 0.197 0.275
4. Ratio of modern inputs
in total inputs 0.164 0.403
Source: National Accounts Statistics (Jan. 1985), CSO, New Delhi.

Notes:
1. The data relating to current inputs and agricultural output are at current prices.
2. Agricultural output covers crop and livestock sectors.
3. Modern inputs consist of chemical fertilizers, pesticides and insecticides, electricity,
and diesel oil.
4. Traditional inputs include items such as seed, organic manure, feed of livestock,
irrigation charges, etc., as well as expenditure on current repairs and maintenance
of fixed assets such as farm implements and machinery, cattle sheds, etc.
Table 19 Chemical Fertilizers: Domestic Production and Imports,

1950/51 to 1983/84 (in 1,000 tonnes of nutrients')
1960/61 1970/71 1980/81

to to to
1969/70 1979/80 1983/84
Domestic Production
Nitrogenous fertilizers 3,050 14,942 12,217
Phosphatic fertilizers 1,318 4,466 3,819
Total 4,368 19,408 16,036
Imports
Nitrogenous fertilizers 4,747 8,147 3,645
Phosphatic fertilizers 777 1,984 1,001
Potassic fertilizers 986 3,654 2,641
Total 6,510 13,785 7,287
Total availability 10,878 33,193 23,323
Ratio of imports to total availability, % 59.8 41.5 31.2
Source: Based on data available in various issues of ‘Economic Survey’, Ministry of

Finance, New Delhi.
Table 20 Relationship Between Aggregate GDP and the

Agricultural and Manufacturing Sectors in the Indian
Economy in the 1960s and 1970s
Equation: log Y = ax + a2 log YAG +

a3log YMF
Period
CL<2_ a3 R2
1960/61-1969/70 0.85060.5546 0.4986 0.974

(4.346) (10.260)
1970/71-1983/84 - 1.1928 0.7923 0.4676 0.991
(4.289) (4.577)
Source: The basic data are from various issues of National Accounts Statistics, CSO New
Delhi.
Notes:
1 Y = GDP (total); YAG = GDP-agriculture
and YMF = GDP-manufacturing.
2. Figures in brackets represent t values. All coefficients are significant at 0.5%.
3. Though the coefficients are significant, caution is needed in interpreting their
magnitudes since there is a high degree of multi-colinearity between the two
explanatory variables. The results can be still considered valid since the explanation
offered by this equation is higher than the inter-correlation between the two
explanatory variables.
4. This specification assumes that the income originating from the other sectors of the
economy is determined by the income generated in the agricultural and manu¬
facturing sectors.
c\r CO CT> r^.

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'a; © o’ O o’
O
<
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I
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*
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co co
/IF = GDP-manufacturing; YAG = GDP-agriculture.
CO o o LO CO
m LO co O o
CM o’ CM T-i o’ -4
CO T“H CM co
o co LO o
LO o co LO
o
pares in brackets represent t values.
CM co’ o’ CO
Significant at 0.5%.
Significant at 2.5%.
o o o
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o Ob o CO
m to CO
o Ob o o
1—1 1—1
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i-H i—i T-H
Table 22 Relationship Between GDP in the Manufacturing Sector

and Non-Foodgrains Production in India, 1950/51 to
1983/84
Estimated equation and periods ax (L<£ R2 DW
1. Log YMF = at + a2 log NFG

1950/51-1959/60 1.3849 1.4864 0.881 2.54
(8.239)
1960/61-1969/70 0.5562 1.7136 0.516 1.49
(3.255)*
1970/71-1979/80 1.8155 1.4532 0.661 1.50
(4.310)
1970/71-1983/84 1.9889 1.4176 0.815 1.85
(7.621)
2. Log YMF, + j = a1 + a2 log NFG (
1950/51-1959/60 1.8358 1.3911 0.822 2.05
(6.156)
1960/61-1969/70 2.2376 1.3534 0.365 1.47
(2.367)**
1970/71-1979/80 2.2723 1.3628 0.721 1.74
(4.653)
1970/71-1983/84 2.2429 1.3728 0.761 2.02
(6.257)
Notes:
(1) YMF = GDP - manufacturing, and
NFG = Index of non-foodgrains production.
(2) Figures in brackets represent t values.
* Significant at 1.0%.
** Significant at 2.5%.
All other coefficients are significant at 0.5%.
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Table 23
u 3 oj
Services
Mining
571 J3
d . H
Total
§
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s 3 R
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C/5 Ob CM
H o o T”1 o o o CO
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C/5 d d d d d d d "Id
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Input-Output Coefficients at Factor Cost for the Indian Economy, 1973/74 (current prices)
Z
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co
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Table 24
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Note: Th
Services
Sources: ‘
Mining
H-t *G Qh
G 'G c/5
Total
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£ <S O') vo CO 03 CM
aj CM T-H CO T-H 03 to
S-H T-H 0 CO 0 O T-H
h d d d d 1 1 d
S
ctj
h
UO T-H
(I-A) Inverse Matrix for the Indian Economy, 1973/74 (current prices)
VO 0 03 CO
'u r^. 03 CM CO O T-H
vo CO VO vo
CO CO CM co t>T tj
u to 03
v
O vo 03 CO
<U 0 O CM CM O T—1 3
 CM
03 CO CO CO co
’3 CO O CM CO T-H
0 O t-h 0 0 O
§ d d d d d
3
a
3
 o
Sh
3 CO 03 t-H CO CO 3
O') CM CO to 0 a
3 CM H 03 03 CO CM c
U 0 CO vo 03
’£ CM 0 0 O co a;
be CM 0 O 0 O 0 -a
< ■H d d d d d

C
be
5 -C
*C
O
Sh 0
+-» >P tj
Table 26
u
3 0
Services
s
Mining
;s
3u MH
0 *c
4H
a
<Z) h
O
c
‘u
be § V
a
s-.
< 2 3 h
Table 27 Trends in Indian Exports, 1970-85
Year Value of exports Quantum index Net terms

(Rs. crores at of exports'1 of trade'1
current prices)
1970/71 1,535.16 106 106

1971/72 1,608.20 107 116
1972/73 1,970.80 120 124
1973/74 2,523.40 125 106
1974/75 3,328.80 133 77
1975/76 4,036.26 147 70
1976/77 5,142.30 174 77
1977/78 5,404.26 168 95
1978/79 5,726.07 180 90
1979/80 6,418.43 199 66
1980/81 6,710.70 238 58
1981/82 7,805.90 198 76
1982/83 8,803.31 210 79
1983/84 9,872.40 n.a. n.a.
1984/85 11,554.78 n.a. n.a.
Source: Economic Survey (various issues), Ministry of Finance, New Delhi.

Note: One crore equals ten millions.
“Base 1968/69 = 100.
n.a. = not available.
Table 28 Loans Issued by Primary Agricultural Co-operative

Credit Societies in Different States in India, 1978/79 and
1982/83 (Rs. million)
1978/79 1982/83
Sum % Sum %
Eastern Region
Bihar 248.5 1.7 277.1 1.1
Orissa 410.7 2.8 1,051.4 4.3
West Bengal 639.8 4.4 417.0 1.7
Western Region
Gujarat 1,517.3 10.4 1,879.1 7.7
Maharashtra 1,614.2 11.1 3,129.4 12.8
Northern Region
Haryana 988.9 6.8 1,765.2 7.2
Punjab 1,224.8 8.4 3,351.4 13.7
Rajasthan 718.9 4.9 1,440.2 5.9
Other states 7,221.4 49.5 11,074.2 45.4
All India 14,584.5 100.0 24,385.0 100.0
Source: Report on Currency and Finance, 1980/81 and 1984/85, vol. II (Statistical Statements),
Reserve Bank of India, Bombay.
Table 29 Share of Agricultural and Non-Agricultural Sectors in

Net Domestic Product'(NDP) and in the Workforce,
1961-81 (per cent)
Census Agricultural sector Non-agricultural sectors

year
NDP Workforce NDP Workforce
1961 49.34 69.51 50.66 30.44

1971 42.76 69.78 57.24 30.22
1981 35.52 66.69 64.48 33.31
Source: V. K. R. V. Rao, India’s National Income, 1950-1980: An Analysis of Economic
Growth and Change (New Delhi , 1982).

Table 30 Tax Ratios in the Indian Economy: 1950-80 (R s. crores at
current prices)
Year Tax revenue GDP
Direct Indirect Miscellaneous Total

taxes taxes receipts
1950/51 231 428 111 770 9,177

(2.5) (4.7) (1.2) (8.4)
1960/61 420 1,040 61 1,521 14,071
(3.0) (7-4) (0.4) (10.8)
1970/71 1,091 3,864 162 5,177 36,736
(3.0) (10.5) (0.4) (13.9)
1980/81 3,574 16,744 303 20,621 113,609
(3.1) (14.8) (0.3) (18.2)
Source: National Accounts Statistics (various issues), CSO, New Delhi.

Note: The figures in brackets represent percentages of tax revenue to GDP.
Table 31 Budgetary Subsidy on Fertilizers
Year Fertilizer Budgetary Subsidy

consumption subsidy per tonne
(million tonnes) (Rs. million) (Rs.)
1976/77 3.41 599 176

1977/78 4.29 2,665 621
1978/79 5.12 3,427 669
1979/80 5.26 6,034 1,147
1980/81 5.52 5,050 914
1981/82 6.06 3,750 618
1982/83 6.39 6,050 947
1983/84 7.71 10,480 1,359
1984/85 8.21 10,800 1,315
Sources: Economic Survey and ‘Economic and Functional Classification of the Central Government
Budget' (various issues), Ministry of Finance, New Delhi.
Note: The budgetary subsidy for 1983/84 relates to revised budget estimates while the
sAme for 1984/85 relates to budget estimates.
Table 32 Budgetary Loss on account of Operation of Government

Irrigation Systems
Year Operating Area Net sown Implicit subsidy (Rs.)

loss irrigated area
(Rs. million by canals (million per ha. of per ha.
at 1970/71 (million ha.) ha.) canal of net
prices) irrigated sown
area area
1950/51 365.6 8.30 118.75 44.0 3.08

1960/61 355.9 10.37 133.20 34.3 2.67
1970/71 1,370.2 12.84 140.78 106.7 9.73
1980/81 4,348.5 15.53 140.30 280.0 31.00
1982/83 5,228.4 15.37 141.77 340.2 36.88
Sources: Based on data available in National Accounts Statistics (various issues), CSO, New
Delhi and Agriculture in Brief (various issues), Directorate of Economics and Statistics,
Ministry of Agriculture, New Delhi.
Table 33 Per Capita Domestic Product in Different States in

India: 1970/71 and 1980/81 {Rupees in current prices)
State 1970/71 1980/81

Andhra Pradesh 586 1,360
Assam 570 1,135
Bilhar 418 958
Gujarat 845 2,150
Haryana 932 2,447
Himachal Pradesh 676 1,571
Jammu and Kashmir 557 1,549
Karnataka 675 1,559
Kerala 636 1,540
Madhya Pradesh 489 1,237
Maharashtra 811 2,329
Manipur 408 1,575
Meghalya 644 1,217
Nagaland 508 1,439
Orissa 541 1,286
Punjab 1,067 2,842
Rajasthan 629 1,220
Tamil Nadu 616 1,413
Tripura 563 1,339
Uttar Pradesh 493 1,212
West Bengal 729 1,586
Total 638 1,559
Source: National Accounts Statistics (fan. 1979) and Monthly Abstract ofStatistics (Apr. 1985),
CSO, New Delhi.
Index of Names
Adelman, I. 100 n. 23 Gadgil, D. R. 24, 30, 93 n. 7, 95 n. 11,

Ahmad, Mahfooz 54 Gandhi 3, 8
Ahluwalia, Isher Judge 40, 97 n. 1 Gandhi, Rajiv 2
Anand, Sudhir viii Ganguli, B. N. 30
Andropov 57 Gerschenkron, Alexander 13
Ghosh, Jayati viii
Baran, Paul 11, 92 n. 5 Glass, D. V. viii
Bardhan, Pranab 42, 96 n. 19, 97 nn. 21, Goldar, B. 98 n. 7
5, 101 n. 33 Goodwin, R. M. 93 n. 5
Bauer, P. T. 91 n. 2 Gorbachov, Mikhail 2
Betdeheim, Charles 92 n. 5 Gupta, S. P. 54, 102 n.5
Bhaduri, A. 99 n. 10
Bhagvan, M. R. 65, 100 n. 19 Haberler, G. 92 n. 3, 93 n. 8
Bhagwati, J. 42, 93 n. 10, 100 nn. 20, 22 Flayek, Von F. A. 5, 91 n. 4
Blumenthal, T. 100 n. 21 Hicks, J. R. 17, 92 n. 8, 94 n. 19, 95 n. 8
Bos, H. C. 91 n. 6 Hirschman, A. O. 91 n. 1, 98 n. 9
Bose, P. K. 93 n. 9
Brahmananda, P. R. 60, 93 n. 8 Ishikawa, S. 97 n. 8
Bukharin 15, 20
Johnson, Lyndon 24
Chakravarty, Lalita viii Joshi, Vijay viii
Chakravarty, S. 91 n. 6, 93 n. 10, 96 n. Jung, W. S. 101 n. 25
15, 97 n. 5, 99n. 10, lOOn. 16, 102 n. 3
Chatterji, Ruchira viii Kahn, A. R. 96 n. 14
Chopra, Kusum 99 n. 9 Kahn, Richard F. 96 n. 16
Kaldor, N. 11,30, 60, 61,62, 83, 92 n. 4,
Dantwala, M. L. 37 93 n. 13, 100 n. 13, 101 n. 27
Das Gupta, A. K. 10, 92 n. 2 Kalecki, M. 14, 23, 24, 76, 93 n. 13, 95 n.
Deng Xiaoping 27 10
de Wolff, P. 91 n. 6 Komiya, R. 94 n. 17
Desai, M. 99 n. 10 Krishnamurty, J. 101 n. 28, 102 n. 2
Desai, P. 100 n. 20 Krueger, A. O. 42, 44, 97 n. 7
Dobb, M. 99 n. 11
Domar, E. D. 12 Landesmann, Michael viii
Dutta, K. L. 102 n. 5 Lange, Oskar 92 n. 5
Lee, Chung H. 100 n. 21
Feldman 13 Lee, E. 96 n. 14
Fields, Gary 100 n. 22 Lewis, Arthur 10, 14, 55, 92 n. 7, 93 n. 12
Friedman, Milton 91 n. 2 Linnemann, H. 91 n. 6
130 Index of Names
List, Frederick 43, 97 n. 6 Radhakrishnan, Sarvapalli viii, 1

Lokanathan, P. S. 30 Raghavan, S. N. viii, 113
Lowe, Adolph 4, 18, 42, 91 n. 3, 94 n. 20, Raj, K. N. 54, 55, 98 n. 4
97 n. 4 Ramsey, F. 92 n. 7
Rao, C. H. Hanumantha 102 n. 5
Rao, V.K.R. V. 30, 53,54, 98n. l,99n.
McDougall, Sir Donald 16, 93 n. 15
12
Mahalanobis, P. C. 3, 12, 13, 15, 16, 21,
Rath, Nilakantha 37
23, 27-9, 60, 61,92 n. 5, 93 n. 9, 94 nn.
Ricardo D. 5
17, 18, 2, 99 n. 11, 100 n. 15
Robinson, J. 95 n. 10, 96 nn. 13, 16
Manne, A. S. 96 nn. 12, 15
Rosenberg, N. 64, 65, 100 n. 18
Mao Ze-dong, 16
Rossenstein-Rodan, P. N. 93 n. 15
Marshall, P. J. 101 n. 25
Rudolph, S. E. 99 n. 10
Marx 3, 8, 12, 57, 65
Rudra, A. 96 n. 12, 99 n. 10
Masani, M. R. 30
Masse, P. 91 n. 5
Saha, M. N. 9
Mathur, G. 94 n. 18
Sato, R. 100 n. 22
Mattick, P. 99 n. 11
Schumpeter, J. A. 76, 101 n. 30
Mehta, Ashok, 30
Scitovsky, T. 100 n. 23
Mill, John Stuart 43
Sen A. K. viii, 26, 93 nn. 5, 16, 96 n. 13
Minami, R. 102 n. 4
Sen, S. R. 22, 94 n. 2, 95 n. 6
Mukherjee, M. 93 n. 9
Shishido, T. 100 n. 22
Myint, H. 4, 93 n. 6
Singer, Hans W. 100 n. 23
Myrdal, G. 29, 59, 96 n. 17, 98 n. 9
Singh, Ajit viii
Smith, Adam 42, 60, 93 n. 6
Narain, D. 95 n. 9 Srinivasan, T. N. 96 n. 19, 97 n. 21
Nehru, Javyaharlal 3, 8, 9, 10, 14, 19, 21, Stern, R. M. 92 n. 3, 93 n. 8
28, 81, 93 n. 11 Steuart, Sir James 60
Nurkse, R. 10, 11,92 n. 3, 93 n. 8, 96 n. Stolypin 24
16 Sutcliffe, R. B. 92
Tata, J. R. D. 9
Olson, M. 97 n. 3
Tawney, R. H. 92 n. 1
Tendulkar, S. D. 97 n. 21
Pandey, A. P. viii
Pant, Pitambar 23, 30, 31 Vakil, C. N. 60, 93 n. 8
Patil, S. M. 101 n. 24 Verdoorn, P. J. 11
Perroux, F. 98 n. 9
Pigou, A. C. 92 n. 7 Wadhawa, C. D. 100 n. 16
Prebisch 11
Preobrazhensky 15, 20 Young, Allyn 11, 92 n. 4
Subject Index
‘ability to transform’ 69 biotechnological changes 67

activities: directly productive 42, rent black economy 77
maximizing 42 Bombay Plan 9
administrative guidance 71; inputs 79; borrowing from households 83
process 44 Brazil 82
agrarian transition 18, 75
agriculture: as ‘bargain sector’ 21,56, 94; caloric intake 85
de-emphasis on 20; energy intensity of capital: accumulation 3, 10, 15, 37; as
56; growth-stimulating effect of 62; ‘machines’ 60, 61; as ‘wage good’ 60,
industry linkages 25, 62; input require¬ 61; costs 65; intensity in agriculture 26;
ments of 61; marketed surplus of 55; intensive 63; productivity 55; saving in
more import-dependent 63; overpopu¬ 68
lation in 87; and price support policy capital formation 53, 61, 89; in human
25; priority for 20; technological terms 84; rate of 65; structural aspects
change in 43; uneven growth rate in 45 of 5
agricultural: development strategy 21,22, capital goods 35, 58, 63-5, 72, 81;
24, 82; expansion 56; inputs 35; invest¬ development of 64, 68; domestic cost of
ment 61; labour 38, 86; production 58, production of 66; efficiency of 66;
59, 60, 62; productivity 29, 52, 76; excess capacity in 22, 28, 69; growth of
revolution 60; surplus 60, 75; transition 64, 65; imports of 64, 66, 68, 78, 84;
59 price index of 54; productive capacity of
agro-based goods 57 12
Andhra Pradesh 22 capital-labour ratios 65
annual plans 23, 65 capital-output ratio 35, 43, 53; in agricul¬
anti-poverty programmes 88 tural production 26; in energy produc¬
area expansion 61 tion 55, 56; incremental 53-5; reduc¬
asset redistribution 37 tion in 68; rise in 53-6
authoritarian political regimes 73 capitalist farming 59
capital-saving: innovations 60; tech¬
balance: between ‘advanced’ and niques 65, 68
‘lagging’ regions 46, 51; between popu¬ capital stock: composition of 54; efficiency
lation and resources 86; of goods and of 65; per worker 7; shortage of 5
services (in Korea) 71; of class forces cascading effects 77
77; of payments 62, 74, 78, 82, 84; central planning 89
‘barter terms’ of trade 61 centralized system of management 73
basic needs 67, 68 centre-state resources problem 51
‘basic sectors’ 81 China vii, 7, 8, 81

choice, present-future 36
‘basket case’ 81
biomedical devices 86 circular flow of income 88
132 Subject Index
closed economy 61, 73 design of 85; potential 60; prospects,

coal-handling and beneficiation 67 81; strategies 27, 84
coarse grains 86 development planning: Indian approach
coefficient matrix: domestic 34; total 34 to 2; Indian experience of vii, 81; logic
commercial: crops 62, 63; energy 98 of 81; method of 88; spatial implications
commercialization 86 of 45
commodity-centred approach 7 devolution of funds 50
‘commodity-fetishim’ 8 diminishing returns 56
commodity imports 22 direct taxes 77
‘communitarian’ elements 86 distribution of incomes 30, 42; concentra¬
competitiveness: in exports 63; in interna¬ tion of 28; disparities in 28; hiatus in 87;
tional markets 64 initial 29; inequalities in 6; prevailing
conjunctive use 50 pattern of 68; and production 35, 36;
consolidation of holdings 59, 99 n. 9 and scarcity of land 5; by sectors 36;
consumable goods 65 and structural incentives 31; transitio¬
consumer durables 26, 57, 62, 85 nal inequalities in 6; unequal 10
consumer goods 73 distribution: aspects of 26, 27; issues 85;
consumption: average level of 34; benefits premisses 27
37; of commercial energy 67; final 56; domestic: absorptive capacity 57; compe¬
growth in 28; per capita 33; private 30; tition 57; demand 11, 69, 73, 74, 78;
redistribution of 29; submodel 34; emergency 82; factors 73; policies 73
supplementary 89 drought 82
controlled experiments 89 dry-land farming methods 63; techniques
‘convenience’ fuels 67 68
cost-effective substitutes 87 ‘dual development thesis’ 94 n. 18
cottage and decentralized sectors 29 ‘dualism’ 78, 88
cotton 86
‘creative destruction’ 74 eastern and central parts of India 58-9, 97
credit: 27; for buying pump sets, etc. 97; economists: neo-classical 84; radical 84
to farmers 25, 27, 59 economy of time 57
crop genetic research, 67 ecological: degradation 10; environment
crop husbandry 6; regional specialization 87
in 23 edible oils 63, 86
crop-sharing 38 education: as equalizing force 28; system
cropping pattern, unbalanced 86 in Korea 71
‘customary economy’ 97 n. 8 efficiency: of the industrial sector 64; in
the use of resources 6, 53, 55; of large
debt profile 75 public corporations 52
debt service ratio 82 elasticity: coefficient 62, 63; of export
Deccan Plateau 63 demand 12; ‘pessimism’ 69; of energy
decentralized basis 88 consumption 67; of GDP in manufac¬
decision-makers 50 turing 62; of supply of wage goods 60
decision-making: centres 85; process 43 electricity: generation 67; tariffs 49
defence: expenditure 77; spending 22, 81 electronics 74
delays in project completion 57 employment: industrial 87; generation of
demand: constraint 62; link with produc¬ 63, 85; opportunities and public works
tion 36 programmes 32
design capacity 66, 68 energy 6, 35; in agriculture 25, 56; con¬
design and implementation, faulty 85, 98 sumption of 67; crunch 67; exporting
devaluation: timing of 69; quantum of 69 countries 55; non-commercial 67, 98;
developing countries 55 pricing policy 67; requirements 67;
development: bureaucracy 14; economics related options 67;
2, experience, of Korea 71; plans, engineering industries 74, 86
Subject Index 133
equitable transfer of resources 49 global downswing 84

equity 49, 78, 88 goal-adequate: behaviour 42; trajectories
excess capacity 57, 81 42
exchange rate regime 73 goal-setting 89
exports: competitiveness in 63; earnings ‘Great Recession’ 70, 80, 92
55, 82; environment 70; fall in unit ‘grass-roots’ level 48
values of 70; growth rate of 35, 70; of Green Revolution: 25, 56, 86, 87; and
labour-intensive manufactured goods distribution of income, savings, and
87; market 62; non-traditional 73; investment 26; and effect on rural
production 73; promotion 72; quantum inequality 25, 27; and labour displace¬
index of 70; sales, in Korea 71 ment 26, 27; and mechanization 26, 27;
external: capital 35, 78; effects 45, 46; and scale neutrality 26; and working
environment 50; payments 82 capital 27
growth: impulse 6; poles 48; promoting
Fabian socialism 9 forces 79; with equity 52, 89; with redis¬
family-planning 86 tribution 32, 33; ‘virtuous circle’ of 11
fertilizers: 74, 85; consumption of 25, 56 Gulf countries 54, 70
financial: assets 26; deepening 79, 83,
102; institutions 49; savings 78, 79; harvest failures 79, 83
structure 83 high-cost economy 64
final product-mix 66 home market 84
fiscal: crisis 51; problems of states 47, 48; human capital 52
sociology 51, 76 human skills 67
Five-Year Plans: First 11, 19, 20, Second
3, 6, 11, 19-21, 27, 60, 64, 69, 84; immobile resources 52
Third 3, 6, 19-21, 27, 28, 33, 65, 69, import: of components 74; demand 62,
76; Fourth 23, 24, 33, 65; Fifth 4, 5, 70; duties 76; intensive 63; of know¬
31-3, 36, 38, 65; Sixth 36, 38, 82; how and capital goods 64; policy 73;
Seventh 70, 79, 83 substitution 18, 35, 48, 61, 62, 69, 74,
‘fixed targets’ model 94 75, 87; surplus 71
food 35; availability per capita 81; cheap imported equipment 58
food regime 22; demand bottlenecks in imports: 20, 35, 58, 61; liberal 64, 68, 69,
32, 93; demand and supply of 23; self- 74, 78
sufficiency 62; stock, 62 inadequate maintenance 72
food crops, bumper 82 ‘incentive goods’ 68
food grains: availability of 68; imports 22, incentive patterns 42
81; inadequacy of 37; marketed surplus income: circular flow of 88; elasticity of
of 64; neglect of food grain agriculture demand 60; in the non-agricultural
in Latin America 83; production 19, sector 59; per agricultural worker 59;
21, 22, 31, 62, 82 per capita 83
‘force analysis’ 18 increasing returns to scale 9,57
foreign aid 33; net 33, 35 Indian economic realities 73
foreign borrowings 83 Indian planners’ views: on exports 12, 15,
foreign capital in Korea, 71 16; on investment 11, 20; on savings
foreign collaboration agreements 64, 74 12; on supply and demand 11
foreign exchange: constraint 69, 73; Indian plans: and the ‘concept of traverse’
crunch 79; saving in 68 38; and consistency 34; and co-ordina¬
foreign trade multiplier 75 tion of activities 39; design and imple¬
fragmentation of holdings 59 mentation of 51; and internal finance
free market: 88, 89; regime in Korea 71 82; major limitations in 17; success of
82; and urban bias 18, 20
Gandhian approach 7; and ecologists 8 indigenous capabilites 68
gestation periods 57 indirect taxation 78
134 Subject Index
industrial: demand for labour 27; growth labour: demand for 85; expulsion 27;
19, 59, 61-2; investment 40, 60; market conditions 73; productive use of
linkages 19; planning 84; policy 72; 66; productivity 65; saving innovations
production 19, 82; revolution 60 60, 86; skills, upgrading of 5
industrial structure: broad-based 84; labour-esque 26
diversification of 18, 64; uneven 46 lagging productivity levels 50
industrialization strategy 19, 21, 61, 62, lagging regions 50, 51
64, 87 laissez-faire 42
industry-agriculture linkages 25, 62 land-augmenting innovations 88
inflation 73, 83; in Latin America 83 land: constraint 26, 55; productivity 38;
information failure 40 redistribution 37; reform 18, 21, 24
infrastructure: bottlenecks 40; capital land-esque 6
costs 55; conditions 86; constraints 70; land-man ratio 5, 26
development 59; facilities 58; require¬ ‘land-saving innovations’ 5
ments 56; support base 73, 99; support, learning-by-doing 43
in Korea 71 learning effects 17, 74
innovativeness 44 less-developed countries (LDCs) 72
input-output structure: 25 ‘liberalization measures’ 73
institutional: infrastructure 67; motive locally available resources 52
forces 9, 51, 81; location 58
‘instrumental inference’ 4, 42 ‘low-cost economy’ 78
integration of regional planning and sec¬ low-level equilibrium 81, 87
toral planning 52 luxury consumption 76
inter-crop imbalances 75
interest payments 77 ‘machinofacture’ 65
inter-industry analysis 34 machine-making capacity 60, 61
intermediate: inputs 72; products 35; machine tools 64, 100
international: division of labour 74; prices machinery of ‘land-esque’ type 6
83 macro-economic performance 82
interregional: diversity 41; inequality 87 macro-model 34
investible funds 61 Mahalanobis strategy: and capital goods
investment: allocation 20; approbate sector 12; genesis of 7; and Soviet
levels of 36, 75; decisions 51; inade¬ planning model 13, 15; weakness of 4,
quate 50; inefficiency 58; in family 23
planning 86; in human capital 41, 89; Maharashtra 48, 87
in irrigation 18, 21,55; in power 40, 55; ‘make-work’ programmes 87
pattern 55; productivity 53; return on managerial culture 79
49, 65 manpower: planning, imbalance in 84;
inward-looking: approach 87; character skilled 84
69; development strategy 84; policy 74, marginal propensity to save 61, 102; in
84 Korea 71
irreversibilities 89 marginal tax rate 77
market: adjustment process 97; different
interpretations of 4, 5; economy 97;
Japan 12, 71, 72, 74 failure argument 11; forces, polarizing
influence of 51; as instrument of plan
implementation 44; -led growth pattern
Karnataka 48 80; mechanism 9; -oriented reforms in
Keynesians 92 China 7; signals 88; socialism in
know-how, import of 64 Hungary 8, 51; and the ‘state’ 51;
Korea (South) vii, 42, 70-2 system 7, 42, 45, 46; vs. plan 2, 4, 42, 44
Korean War 10 tnarketed surplus 64, 76
Kuznets-type pattern 85 mass consumption 11, 76
Subject Index 135
material balances 23 Planning Commission vii, 30, 31, 47, 58

means of production 85 plan implementation: failure of 41, 44;
Mexico 25, 82 method of 88; weak links in 39
minimum: level of living 30, 32; needs 35 ‘plan-weariness’ 2
mistaken choices 84 plant load factors 85
mixed economy 14, 29, 36, 50, 81 planning process in India 47; and
mobility: of capital 45; of unskilled labour centre-state relationship 47; and
75 functioning of the system 48; strategy of
modernization 55, 85; in China 7 69; strengthening of 51
monetary demand 76 polarizing influences 45, 46
money demand for goods and services 79 political consensus 89; elite 51; legitimacy
monitoring 58 83; uncertainty 82
monopoly gains 69 potential output 87; in Korea 71
multi-level approach 51 potential welfare 84
multiple economies 88 poverty 5, 85, 86; alleviation of 80;
‘barrier’ 86; eradication of 63; line 85;
National Sample Survey 76, 85 and nutritional adequacy 32; reduction
nationalized banking 79 in 36, 59; spatial dimensions of 46, 47
Nehru-Mahalanobis strategy 6, 19, 27, power base, in Korea 71
28 power sector 40, 47, 58, 85; planning of
neo-classical welfare theory 88 40; transmission of power 67
New Economic Policy 15 population: accelerated decline in 87;
newly industrializing countries (NICs) growth 23, 32, 42; limitation of 37;
73, 83 non-agricultural 58; reduction 86
non-commercial energy 98 price-cost relationships 88
non-distortionary taxation 44 price: increase 22, 23; signals 6, 40
non-price signals 41 price-theoretic: dimensions, 44; terms 43
North America 66 prices: of necessities 76; and wages 36
North-Eastern States 49 primate cities 52
Nurkse-Kahn point 29 primitive accumulation 3, 10, 84
private investment 78
occupations: distribution 76; pattern 76; procedural matters 58
stasis 76; structure 87 processing industries 76
oil exploration and drilling equipment 63 product-mix, flexibility in 74
oil-price rise 70 product wage 21, 95
oil-production 75 production: and distribution process 86;
open budgetary exercises 50 efficiency of 88; functions 45
open-cast mining 58 productive: assets 87; capacity of Korea
open democracy 73 71
‘open door’ policy 73 productivity: of different crops 63; and
open economy 61; small 75; education, health, and nutrition 37;
‘open loop’ character 97 growth in China 8; levels in fertilizers
opening up the economy 88, 102 and chemicals 63; of small and mar¬
openness of the economy 42, 64 ginal farmers 37
outward-looking policy 84, 101 productivity-wage nexus 29
overcapitalization 58 profit maximization 41
property-owning classes 85
parametric behaviour 41 ‘property rights’ 102 n. 3
perspective planning 89 protectionist measures, 70
Perspective Planning Division 30 public: consumption 80; goods 52
Philippines 25 public enterprises: management of 58;
plan budget 34 surpluses from 79
‘plan holiday’ 81 public investment: in agriculture 11, 31,
136 Subject Index
75; cut backs in 23; decrease in 22, 23, self-sufficiency in modern capital goods 65
30; increase in 22; in industrial self-reinforcing feedbacks 76
development 11; politicization of 58; self-reliance 33, 76
rate of 76, 78, 79; rate of growth in 57; semi-feudalism 59, 99 n. 10
resources for 17; rising level of 69; share semi-industrialized countries 72
of 78; slackening of 69, 70 ‘servomechanism’ 4
public sector: inefficiency of 30; producti¬ short-term: demand 68; options 67; profi¬
vity of 29; savings 51, 83 tability 68; rents 78
public works 87; and employment oppor¬ small and village industries 8, 29
tunities 32; and mass poverty 32; rural small farmers 59
102 social: absorption capacity 102; and
pulses 86 economic'costs 78; factors 59; pressures
Punjab 22, 31 68; problem 86; structure 86; tensions
purchased inputs 25, 61, 62 87
purchasing power, inadequacy of 37 socialism 8
‘socialist framework’ 9
qualitative upgrading 86 socio-economic considerations 86
quantitative controls 84 socio-economic priorities 67
quantitative expansion 86 socio-historical process 89
solar energy, utilization of 67
railway management 73 spatial dimensions: and economic sti¬
real wage rates 72 mulus 45, 46; and external effects 45,
‘recursive backwardness’ 13 46; and market system 45, 46; and
redistribution: design of 89; policies for mobility of capital 45; and transporta¬
88; processes 86 tion costs 45
programmes 88; strategy 21 spatial environment 49
‘reformists’ 91 specific markets 73
regional autonomy 50; equitability 52; stabilizing influence 84
‘haves’ 50; specialization 52, 61 standard of value 83
regulatory framework 88 standardization 72
replacement investment 55 ‘state economy’ 97
resource allocation, inefficiency of 84; state highways 73
resource bases 75 state intervention 51
resource mobilization 51, 79, 88 strategic: action 41; behaviour 41; mis¬
resources: efficiency in the use of 6, 59, takes 85
89; scarce 57 structural: adjustment 43; backwardness
rural development, integrated 9, 27; break 2, 3; changes 2, 4, 25, 98;
programme of 37 constraints 9, 10, 69; limitations 9; pro¬
perties 44
savings: constraint 5, 9; gross domestic structuralists 10, 92
53, 54, 81, 83, 89; increase in 83; of subcontracting, by Japanese 72
household sector 83; public 30, 51, 83; subsidies 42, 43, 77
rate, in Korea 71; ratio 43, 53, 61; supply botdenecks 57
structural limitations in the conversion supply and demand: analysis 91; manage¬
of 9; out of taxation 29; transient ment 83
factors in 54 surplus labour 9
scale: diseconomies 78; economies 72, 74; surplus product 84
factor 72; neutrality 26
Schumpeterian view 74 Tamil Nadu 22, 48
‘scientism’ 8 tax: and the agricultural sector 49; haven
‘second-best’ 88 77; policy 76; reduction 77; -to-GDP
seed-fertilizer technology 26 ratio 76
self-consumption 61 taxable capacity 49
Subject Index 137
technological: backwardness 64, 65; United States 21

breakthroughs required 67; change 68; UK 49
choice 66; improvements 64, 66; inno¬ US Public Law 480, 81
vations 66; know-how 62; lag 64, 65; USSR (also Russia, Soviet Union) 7,
modernization 24, 102; obsolescence 13-15, 57
78; transfer 43 unorganized industrial sector 77
technology: agreements 66; assimilation upgrading of technology 58, 74
of 74; futuristic 67; imports 66, 68; upper-class consumption 78
latest-vintage 78; upgrading of 58, 74 urbanization 55, 58; and growth of
tenancy 38, 99 n. 9 primate cities 52; premature 52
terms of trade, net 70 Uttar Pradesh 22, 99
tertiary sectors 76
‘textile first’ strategy 84
theory of‘traverse’ 17, 84 vertical integration 72
tied aid 72
total factor productivity growth 89, 98 n. 7
trade, gains from 84 ‘wage advances’ 27
trade union activities 71 wage goods 60
transfer of knowledge 71 water management 59, 86, 99 n. 9
transformation of rich peasantry 77 welfare state 81
transition path 42 West Bengal 48, 49, 89
transport networks 55 wheat revolution 86
trickle-down strategy 29, 51 work ethic 68
working capita! 27, 59
underemployment 36, 88 world economic: conjuncture 83, 84;
unitary form of federalism 50 environment 84
date due
DATE DUE
DATE DE RETOUR
MAR 1 ( ZUUJ
-MAR 0 L 2000"
0 1 2001
CARR MCLEAN 38-296

utr 435 2 .C467 1987 010101
UTLAS
HC435.2 .C467 1987
/
Chakravarty, Sukhamoy
the Indian
Development planning
experience
893835

Development Planning - The Indi - Chakravarty, Sukhamoy

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The Indian Experience

CLARENDON PRESS • OXFORD

Oxford is a trade mark of Oxford University Press

Published in the United States

© Sukhamoy Chakravarty 1987

All rights reserved. No part of this publication may be reproduced,

British Library Cataloguing in Publication Data

Library of Congress Cataloging in Publication Data

Set by Colset Private Limited, Singapore

India’s attempt at planned development over the greater part of her

1 Indian Planning: Basic Features and Analytics 1

3 Vicissitudes in the Career of a Strategy 19

4 Problems of Plan Implementation 39

/ 5 Some Current Issues of Economic Policy 53

The present book, which develops the themes I initially presented in

conception. At the moment, there are indications that some major

of India’s planned development in terms of the logic of pressure-group

more self-conscious than that attempted in many third world

analogues are left to be implemented through the market. There are, of

involves the introduction of machinery of ‘land-esque’ type and/or

Genesis of the Nehru-Mahalanobis Approach

which was presented as the development of a ‘socialist man’ based on

and economic, to which the modernizing elite subscribed.

Structural Constraints and the Development Strategy

The underlying causes of structural backwardness were perceived as

industry and particularly of heavy industry. The reason is that in con¬

(1955-60), however, a major change was brought about. As already

A model of exactly this type was developed by Feldman in 1928 in the

expression ‘socialist model’ is frequently employed. For certain

as practised during the twenties, the situation was more complex

industrialization has proceeded some way that increased production

met by pursuing ‘capital-light’ methods of production. That this would

Vicissitudes in the Career of a Strategy

The Development Strategy in Operation: 1950-65

between the principal Soviet theorists and the major architects of

on the large-scale import of food grains under PL480 (which enabled

a sound financial policy must be based on two very different elements:

While Kalecki’s recommendations did not make much impact at the

New Agricultural Policy: Characteristics and

To overcome the ‘agricultural stagnation’, a new strategy of agri¬

1. a shift in emphasis from ‘major’ to ‘minor’ irrigation works, which

to be obtained on the basis of market transactions. Apart from seed, the

Distributional Aspects in the First Three Plans

It may be useful at this stage to clarify the distributional premisses

redistribution. On the issue of land redistribution he had written,

consumption with an unchanged total could lead to an increase of

process. The model failed as a redistributive device because the initial

spectacular breakthrough in the north-west, especially the Punjab, and

Growth with Redistribution

1. A breakdown of total investment by delivering sectors was drawn

Several alternative scenarios were worked out to test the sensitivity

number of poverty eradication measures were introduced. The impact

the cards, it is certainly possible to do a great deal more in relation to

Weak Links in the Indian Planning Process

inter-regional diversity in the rate and pattern of growth of demand, and

1. Planning authorities are plainly inefficient in gathering the rele¬

A useful elaboration of condition 3 is to distinguish between the

degree of ‘openness’ of the economy has increased in recent years.

basic question remains: can a market system, especially an open

direct investment in appropriate forms of human capital appear to be

Spatial Implications of the Development Strategy

In my discussion on problems of plan implementation, I have thus far