The planned economy

The first principle

A poor country with little private capital cannot wait for markets alone to build steel mills, dams and power grids, because these need huge sums, take many years to pay back and serve the whole economy. Planning meant that the state would decide how scarce savings and foreign exchange were used, and would itself invest in the base of the economy. Because the state chose where to invest, planning also became a tool to spread development to regions that colonial rule had left behind, though correcting regional imbalance was only one of its aims and the one it met least fully.

The core

Why India chose to plan

• Colonial rule left an economy whose national income grew by less than one per cent a year in the first half of the twentieth century, with income per head almost static, with weak industry, low farm yields and development concentrated in the port cities of Bombay, Calcutta and Madras.
• The idea of planning was shared widely before 1947: the Congress set up a National Planning Committee under Nehru in 1938, and leading industrialists in the Bombay Plan of 1944 themselves asked the state to invest in basic industry. The rapid industrialisation of the Soviet Union seemed to show what a planned economy could do.
• The Planning Commission was set up by a Cabinet resolution in March 1950 with the Prime Minister as chairman, and the National Development Council (1952) brought in the Chief Ministers.

The early Plans

• First Plan (1951 to 1956) gave the largest share to agriculture, irrigation and power, after Partition and food shortages, and it exceeded its modest growth target.
• Second Plan (1956 to 1961) followed the model of P C Mahalanobis, which gave priority to heavy and capital goods industries so that India could make its own machines. It set up three public sector steel plants and was cut back by the foreign exchange crisis of 1957.
• Third Plan (1961 to 1966) aimed at self reliance in both food and industry, but the wars of 1962 and 1965 and the droughts of 1965 and 1966 left growth far below target, and three annual plans, the plan holiday of 1966 to 1969, followed.
• Industrial policy. The Industrial Policy Resolution of 1948 set out a mixed economy, and that of 1956 reserved 17 industries in Schedule A for the state, giving the public sector the commanding heights. Private industry needed licences under the Industries (Development and Regulation) Act, 1951, which grew into the licence permit raj.

Dimensions

• Economic. Planning built an industrial base in steel, machines, power and chemicals, and great multipurpose dams.
• Regional. Public sector plants were placed in backward but mineral rich areas, while dams opened irrigation in new regions.
• Social. Plans funded community development, education and health, though land reform and poverty reduction lagged.
• Institutional. Planning created the Indian Institutes of Technology, starting with Kharagpur in 1951, national laboratories and public sector enterprises.
• International. Steel plants were built with Soviet, West German and British help, showing how non alignment let India draw aid from both blocs.

In practice

Was planning adopted to correct the regional imbalances left by colonial rule?

• Evidence that it was. The Plans named balanced regional development as an aim, and the Third Plan stressed it directly. Bhilai, in a tribal belt of Madhya Pradesh, Rourkela in Orissa and Durgapur in West Bengal brought steel to regions with no modern industry, and Bokaro in Bihar followed. The Damodar Valley Corporation (1948), modelled on the Tennessee Valley Authority of the United States, Hirakud on the Mahanadi and Bhakra Nangal in Punjab were meant to develop whole river basins, and Nehru called such projects the temples of modern India. Later, the Gadgil formula (1969) gave backward States more central assistance, and backward area and tribal sub plans followed in the 1970s.
• Evidence that it was not the main aim, and fell short. Growth, heavy industry and self reliance came first, so investment went where raw materials, power and ports made it efficient. The freight equalisation policy of 1952 made steel and coal cost the same everywhere, which took away the cost advantage of the mineral rich eastern States, and it was ended only in 1993. Steel towns stayed enclaves with few local suppliers, private industry under licensing still preferred established centres such as Bombay and Ahmedabad, and the Green Revolution later concentrated farm gains in the irrigated north west. Bihar and Orissa remained among the poorest States.
• Balanced view. Planning did use location as a deliberate tool against the colonial pattern, but its design favoured national growth over regional equity, so the gaps it inherited narrowed little.

Case: the Damodar Valley Corporation

Set up by an Act of 1948 for flood control, irrigation and power in the Damodar basin of Bihar and West Bengal, it was India's first multipurpose river valley authority. It built dams such as Maithon and Panchet and supplied power to the coal and steel belt, but it fell short of its flood control and integrated development goals because the two States and the Union shared control.

Issues and way forward

• Slow growth. Growth averaged about 3.5 per cent a year from the 1950s to the 1970s, which the economist Raj Krishna called the Hindu rate of growth, because licensing, controls and loss making public firms held back productivity.
• Neglect of agriculture. The Second Plan's tilt to heavy industry and slow land reform left food output short, which led to food imports in the 1960s.
• Foreign exchange constraints. The 1957 crisis and the 1966 devaluation showed the limits of import substitution.
• Regional gaps. Investment alone could not create growth where markets, skills and governance were weak.
• Reform. Liberalisation in 1991 ended most licensing, and NITI Aayog replaced the Planning Commission on 1 January 2015, shifting from fixed Plans to cooperative federalism and policy advice, with schemes such as the Aspirational Districts Programme (2018) targeting backward areas.

Common confusions

• Bombay Plan and the Second Plan. The Bombay Plan of 1944 was proposed by industrialists; the Second Plan of 1956 was the Planning Commission's heavy industry plan based on the Mahalanobis model.
• Industrial Policy Resolutions of 1948 and 1956. The first set out a mixed economy; the second gave the public sector the commanding heights with Schedule A.
• Planning Commission and NITI Aayog. The Commission allocated Plan funds to States; NITI Aayog is a policy think tank without that power.
• Freight equalisation and the Gadgil formula. The first equalised prices of key goods across India and hurt the east; the second shared central assistance among States with weight for backwardness.

For the exam

• Keyword bank: Bombay Plan, Planning Commission, Mahalanobis model, Industrial Policy Resolution 1956, commanding heights, licence permit raj, Damodar Valley Corporation, freight equalisation, Gadgil formula, balanced regional development, plan holiday, NITI Aayog.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction (data): The First Plan grew at about 3.6 per cent a year against a target of 2.1 per cent, a sharp break from colonial stagnation.
  • Introduction (judgement, quote or report): Nehru called the great dams the temples of modern India, expressing the belief that planned public investment would build the nation.
  • Conclusion: Planning laid India's industrial and institutional foundations, but it narrowed the colonial pattern of regional imbalance only a little.
  • Conclusion: The shift to NITI Aayog reflects a lesson of the planned era: backward regions need governance, skills and markets as much as public investment.